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The Best Little Nodal Market in Texas

Sweating the details for 2009.

Fortnightly Magazine - September 2007

the total congestion cost to net energy load. Between August 2001 and December 2006, ERCOT congestion costs exceeded $1.7 billion. Of this amount, about $1.4 billion has been caused by local congestion. In 2004, the average congestion cost was $1.07/MWh. For 2005, average congestion costs have increased by 7 percent. This increase came mainly from zonal congestion costs more than doubling in 2005. According to a recent ERCOT report, the major driver behind the higher zonal congestion costs is an estimated 40 percent increase in fuel costs for the year. In 2006, average congestion costs decreased significantly to $0.93/MWh driven by a decrease in both local and zonal congestion costs as a result of the declining fuel prices in combination with continued transmission-system improvements.

Between the start of the pilot market in 2001 and the present, local congestion costs approached $1.3 billion. This represents about three times as much as the interzonal congestion costs handled through the CSCs, which is less than $380 million. Currently, local congestion costs are uplifted to all market participants regardless of who is causing the congestion. This contentious issue is one of the main reasons ERCOT is restructuring to become a nodal market. After peaking in 2003, local congestion costs seem to have subsided in recent years. As shown in Figure 3, local congestion costs between 2003 and 2006 have decreased by about 53 percent. The biggest decline in 2005 occurred in the RMR costs, which declined by 18 percent. Average local congestion costs in 2006 have declined by almost 19 percent from their 2005 levels. High local congestion costs have been avoided recently through investments in “new transmission and other operational improvements.” 5

Implementing the Texas Nodal Market

Originally scheduled for implementation by October 2006, the TNM is now not expected until December 2008. While reassuring its support for the nodal market paradigm, the PUCT has indicated that a later implementation date would allow market participants enough time to become educated about the market and prepared for effective participation.

Last year, ERCOT and the TNT created the Transition Plan Task Force (TPTF) to review and approve business requirements and design components related to the transition to nodal pricing. The TPTF’s role and structure would be similar to that of the TNT, with ERCOT staff having the final word when issues are not resolved. The transition process also calls for a market participant team to resolve technical issues. The nodal transition plan categorizes activities into four tracks:

• System specification, procurement and development (ERCOT);

• System procurement and development (market participants);

• Market training; and

• Systems testing and nodal market implementation.

In late March 2006, the ERCOT board of directors unanimously approved a resolution to seek authority from the PUCT to impose a system administration fee surcharge to recover costs associated with the TNM design, based on a “flat-fee option,” which would use a blend of borrowed funds (62 percent) and a nodal surcharge (38 percent) to produce a relatively flat fee between 2006 and 2012. In August 2006, the PUCT approved the implementation of a