As Texas' transition to a revamped electric grid fast approaches, lawmakers on the Senate Business and Commerce committee met with industry reps and state officials Oct. 25 to discuss expected changes in the electric market.
The hope, and the prediction by some, is that this new "nodal" market will save consumers billions on their electric bills. But some are predicting unintended side effects.
But first, what the heck is ‘nodal’?
The transition from a zonal market to a nodal market means that the Electric Reliability Council of Texas' grid, which has been divided up into only four congestion management zones (Houston, North Texas, South Texas, and West Texas), will now be diced up into more than 4,000 "nodes."
In the current zonal market, the cost for congestion is uplifted -- or, to use the utility industry term, "socialized" amongst consumers throughout the state as the overall cost of electricity. Running a more efficient market can lower the amount of socialized power cost.
Think of a patient who complains to the doctor of pain in his right leg, but can't finger the exact location. That's zonal. Treatment of an entire leg will not be very precise or efficient. It will therefore cost more.
A patient who can say the pain is localized on his right quadriceps femoris is likely to get more precise and efficient, and therefore cheaper, treatment.
Similarly, the transition from zonal to nodal will allow the ERCOT grid to pinpoint more precisely high energy demand and congestion areas (think "pain"). Therefore "treatment," i.e., congestion management and transmission construction, will be more precise and efficient, and thus cheaper.
In theory, at least.
Tripp Doggett, ERCOT president and CEO, said that a successful nodal transition would mean a more reliable market, and more accurate management of congestion and system frequency. He said that preliminary market testing has shown the best frequency control ERCOT has ever had. A cost-benefit analysis called for by PUC has predicted $5.6 billion in savings for electric consumers during the nodal market's first 10 years online.
That means savings to consumers and the generation market, because nodal is supposed to better handle congestion, hence cut generation costs. In the nodal market, up-to-date prices will be published every 15 minutes, creating more transparency and encouraging better incentives for generation and transmission to build and locate where it is needed the most, ERCOT spokesperson Dottie Roark told LSR. Basically, it will lead to more transparent energy prices in the wholesale market, Roark said.
It's been a long time coming. PUC first told ERCOT to design a nodal market in September 2003. In March 2006 PUC approved a surcharge for ERCOT to start assessing generation owners to pay for a market redesign, at which point the preliminary budget was set at $125 million, and nodal was expected to go live in January 2009.
That, of course, didn't happen. A $644 million budget was approved by the ERCOT board in February 2009, and the go-live date was pushed back to December 2010, much to the chagrin of the PUC and lawmakers.
Alas, there are no signs that the go-live date will be pushed beyond Dec. 1 of this year. But will it be a mixed blessing?
Chris Brewster, with the Steering Committee of Cities Served by Oncor, said that the nodal market will give rise to a whole new set of charges that do not exist in the zonal market. He said energy prices would be difficult for retailers to model and plan for.
"I think it's reasonable to expect that a number of REPs [retail electric providers] could default in the next year or two as we make this transition," Brewster said.
Marcie Zlotnik, chairman and COO of StarTex Power, an electric provider that began when the market was first deregulated, said that does not mean the sky would fall. Zlotnik is on the ERCOT board of directors.
"Perhaps some of my competitors will fail," Zlotnik said. "Perhaps they will. … I can assure every single person here: no one will go without power. Period."
To help retail electric providers prepare to function in the nodal market, ERCOT has held training workshops attended by more than 800 representatives from at least 70 companies. ERCOT has also done more than 38 energy retailer site visits. The last nodal training workshop is set for Nov. 9, and ERCOT is sending all REPs a DVD of one of its workshops. That’s to make sure everyone has a chance to review it, Roark told LSR.
ERCOT has done nearly 200 hours of market trials, Roark said. On Nov. 15 it will do a "soft launch" during which some zonal will come online. The day-ahead market will open up on Nov. 30. The nodal market's first official operating day -- when prices become binding on market participants and consumers, will be Dec. 1. Even then, some of the zonal market will remain online because ERCOT expects to see some glitches, Roark told LSR.
The push for opt-in and the fruits of deregulation
The hearing saw the latest in an ongoing fencing battle between electric companies and longtime electric deregulation skeptics, the Cities Aggregation Power Project (CAPP).
R.A. Dyer, a policy analyst for CAPP, told the committee that since 1999, when deregulation was first passed in SB 7, residential prices for Texans remain above the national average, despite currently favorable natural gas prices. This outcome would not be expected if the market were operating more efficiently, he said. Natural gas prices largely determine the price of energy in Texas, he said.
CAPP has called for "opt-out" aggregation as opposed to the "opt-in" aggregation currently in statute thanks to SB 7. Aggregation occurs when a large number of electric consumers bind together to negotiate with retailers in hopes of getting a volume discount. Opt-in means that individual entities, like independently-owned chain restaurants, would have to consent to being included in an aggregation. Opt-out would mean that the individual entities have to inform the aggregation in question that they don't want to be included in the negotiation.
One of CAPP's bills, which has been brought unsuccessfully in recent sessions, including the last one, would create opt-out aggregation for cities. In other words, it would allow a city to aggregate its residents for purposes of negotiating with electric providers. Opponents of the bill have claimed the bill would take away consumer choice.
Fraser characterized Dyer's remarks as a "rousing endorsement of nuclear and coal." Fraser said that if the state wants to "hedge" its dependence on natural gas, it will have to build a lot of coal and nuclear power plants -- an initiative on which many in the press and the public interest trade do not look kindly. Fraser said he thinks the prices of electricity would likely have been high whether or not Texas had deregulated the electric market.
Carona questioned how two different groups could come up with such radically different numbers on the fruits of electric deregulation. Dyer said that proponents of deregulation cherry-picked a spike in prices immediately before deregulation was implemented. Utilities were allowed to raise their prices in order to offset their stranded costs (i.e., costs to which they were legally entitled in the regulated world but which the deregulated market would not fully repay).
Proponents of deregulation tend to compare the lowest available prices on the market before and after deregulation took effect, while opponents of deregulation compare average prices before and after. In other words, deregulation opponents show the prices that consumers actually pay, while proponents show the prices that consumers could pay if they shopped around.
John Fainter, president and CEO of the Association of Electric Companies of Texas, also observed that information from the Edison Electric Institute showing Texas' energy prices higher than the national average is now outdated.
"I have asked people at EEI … the National Trade Association and many others, to advise me how EEI calculates their data," Fainter said, "and I can find nobody that can with any authority tell me how their data is calculated.. There's no question the data that they use is higher than what we see in the market and has been for an extended period of time."
Bill Peacock, director of the Center for Economic Freedom at the Texas Public Policy Foundation, said that no matter which set of data one uses, it can be definitively said that the cost average in Texas is lower than the national average. If you look at national price versus power to choose, it's about 17 percent lower than the national average.
Peacock also said that varying data sets can be pulled out by looking at different months of the year. He observed that Energy Information Administration data, cited in CAPP's 2009 report slamming deregulation, covers the entire state, while the Power to Choose website covers only competitive prices in ERCOT, where deregulation would actually have an impact.