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Regulators Didn't Need To Raise Price of Electricity To Keep Lights On

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As of Wednesday, the wholesale price of electricity generators can charge during times of peak demand goes up 50 percent. And as it turns out, that's probably a waste of money.

Regulators are worried because it looks like we won't have enough generating capacity to meet Texas's growing needs. Problem is, none of the generators are stepping up to build new power plants. The price of natural gas generally sets the market price for electricity. That price has been low ever since it took a dive in 2008.

So, the rationale over at the Public Utility Commission is: Give them more money and maybe they'll build new plants and we won't have to resort to rolling blackouts when a summer scorcher tests the grid. That's just blind hope, though. It's basically a free market. They can't makethem build anything.

Inevitably, retail providers pass the buck to the consumer. But if a report from the market monitor that evaluates the ERCOT grid is any indication, we won't get much bang for it. Generators made enough profit to build new plants, the monitor found. But for whatever reason, they just didn't. Average electricity prices in 2011 were 35 percent higher than the year before. During that record August heat, they were 160 percent higher than the same month in 2010. While these revenues might not support new coal or nuclear plants, they're more than enough to justify the construction of a gas-fired plant.

So, why not? Is it our system? A capacity market, for example, pays generators to meet certain supply levels. Our market relies only on high prices that reflect scarcity. Power reserves get low, generators make more money and bring plants online. In the industry parlance, it's called sending the right "price signals." Yet if no one heeds the signals, what then?

In this kind of market -- unique in the country -- is there any incentive to create an adequate supply of electricity, or is scarcity simply good for business?

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