How Will Raising the Cap on Electricity Prices Affect You? How Do You Think?

How Will Raising the Cap on Electricity Prices Affect You? How Do You Think?

When Texas Public Utility tentatively voted to increase the ceiling on the wholesale price of electricity by 50 percent by August 1, public reaction was swift.

It sounded like this: chirp ... cheep ... when you wish ... chirp ... cheep ... upon a star.

Which was surprising. Stereotypically, you'd think any state official willing to tack the words "50 percent increase" to the words "electricity prices" would be legging it for the Oklahoma border while stalwart Texans loaded up their pickups for a trip to Austin. ("Ma, fetch my shotgun, we're goin' to exercise our constitutionally protected rights to assemble and seek redress o' ... dang it, woman! Not that one, the other one. That 12-gauge's my 10th Amendment gun.")

Of course, being professionals, we here at Unfair Park do not engage in crude stereotypes (except during working hours, which is what makes us professionals). So we called PUC Commissioner Kenneth Anderson to talk about this potential price increase, how it will meet its goal of encouraging electric generators to build more power plants and what it will mean for you, the consumer.

I had three basic questions for Anderson:

1. What's this gonna cost me?

2. The wholesale price of electricity hits the cap only a handful of occasions a year, for fairly short periods during times extreme weather. That being the case, how will raising this cap encourage power companies to undertake the enormous expense of adding plants that will be infrequently used?

3. Seriously, what's this gonna cost me?

The short answer to questions 1 and 3, Anderson says, is this: It's complicated.

Not that Anderson wasn't helpful, but asking an expert to explain the power market in layman's terms is like a saying to a theoretical physicist: "Hey, doc, what's up with this string-theory biz? Gimme the scoop now, and none of that fancy math talk."

The effect on consumers of a steep increase in the price cap will be varied and gradual, says Anderson, who voted against boosting it this August. Electricity retail companies buy futures contracts to hedge against price shocks in the "real-time" spot market, which fluctuates in intervals of a few minutes. (Even lowly consumers get in on the hedging a bit by signing up for long-term fixed contracts with electric retailers.) Futures contracts are traded, and tons of money can be made by either side of a deal depending on spot market prices. Place the right bet, and a good hedger can make dough without ever burning a lump of coal or selling a watt.

Put all that activity together, and "this is why there's a disconnect between those [wholesale market] prices and what consumers actually experience," Anderson says.

Still, the buck starts somewhere, and the PUC's vote last week already has begun to cause ripples in the whole complex structure. Reuter's reported this week that the state's "forward electricity prices" -- the cost of those futures contracts -- have already risen in response to the PUC's action. Faced with the risk of a big jump in spot market prices if the cap on wholesale electricity goes up, big purchasers of power need to hedge their bets. Says Reuters:

ERCOT [Electric Reliability Council of Texas] North power for this summer is trading around $66 per megawatt-hour. For summer 2013, the price is about $92 per MWh and summer 2014 is about $107 per MWh, according to GDF Suez.

That compares to 2011 when ERCOT North power averaged $78 per MWh in July, then jumped to an average of more than $225 per MWh in August when ERCOT was forced to declare emergencies on a half dozen days to avoid rolling power outages.

Those sub-$100 prices on average help explain how raising the price cap on electricity from the present $3,000 per megawatt-hour to $4,500 by August 1 will lure generators to build more plants capable of firing up quickly. Operators of so-called "peaker" plants can make a boatload of money operating only a few days a week, for short periods when spot prices soar. Upping the cap means they're gonna need a bigger boat. Check out this post at for one viewpoint on who's going to be filling that boat with bucks. (Hint: Find a mirror.)

"I expect there will be some influence on residential prices, but it'll be over time," Anderson says.

Of course, Texas' hunger for electricity is rapidly growing. The state needs plants that can start up quickly and efficiently, Anderson says, like"combined cycle," gas-fired plants. He expects to see the number of combined cycle units grow in the future -- supplanting coal and bringing cleaner air and less waste.

That is, of course, a good thing -- and the good things in life are not, despite what you might have heard, free.

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