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Trial and Error in Texas


A hard year puts deregulation to the test.

Fortnightly Magazine - January 2009

The ERCOT wholesale markets rely on what’s called zonal pricing to accommodate congestion cost—prices reflect the average congestion in each of more than 30 zones. But zonal congestion pricing largely has become discredited, according to the latest thinking about wholesale electricity markets. Even CAISO, the California Independent System Operator—the most well-known prior adherent to that idea—decided to scrap zonal pricing in favor of nodal pricing in its MRTU initiative (Market Redesign and Technology Update).

“To the PUC’s credit, they saw this coming and were already working really hard to develop nodal pricing market platform for ERCOT,” Kiesling explains. “It’s just a massive endeavor.”

In fact, ERCOT and the PUC long have contemplated a move away from a zonal congestion pricing model, with the PUC launching an investigation to study ERCOT’s wholesale market design as far back as April 2002. That move came on the heels of a sharp spike in natural gas prices in the fall of 2000, which in turn produced an explosion of wind farms in West Texas in 2001. But with the ERCOT market lacking the nodal-locational price signals then common to such wholesale markets as PJM and New York, Texas saw developers locate 1,000 MW of new wind capacity in West Texas on the wrong side of a 500-MW transmission constraint in the Pecos River area. That left the new wind turbines partially stranded, lacking grid access to load centers farther east.

Moreover, Texas officials began voicing concerns about phantom congestion and gaming of decremental bids—the very same market distortions seen earlier in California, at the peak of the Golden State’s notorious power crisis, due in no small part to CAISO’s reliance on imprecise zonal approximations for congestion pricing.

Beginning in 2002, proposals started to emerge to move the ERCOT market toward a more granular design, with unit-specific bidding in place of portfolio bidding, and locational marginal pricing (LMP) with prices specific to individual buses (termed “nodes”) on the grid system. The PUC’s market oversight division suggested a hybrid, middle way, based upon flow gates and physical grid rights. But even then, industry leaders warned that such changes would come only at very high cost—and with customer benefits uncertain at best  (see “ Winds of Change in Texas ,” Fortnightly, April 1, 2003) .

Now, some six years later—on November 26, 2008 to be exact—ERCOT submitted a revised timeline to the PUC, reporting that it will implement nodal pricing in December 2010, at a projected project cost of $660 million.

Retailers of Last Resort

Other changes are coming in Texas as well—some involving barriers to entry in the retail market.

“The market spikes caused five small REPs to go out of business,” says John Fainter, president of Association of Electric Companies of Texas. “It affected 40,000 customers—less than one-tenth of 1 percent of the market. I don’t want to minimize anything, because I think it’s going to take time to work through, but I think to a large extent it’s stabilized.”

Stabilized, yes. Resolved, no.

“The commission, as a result of what happened earlier this year, is undergoing