Texas lawmakers advance big changes for ERCOT in post-Feb. 14 storm bills

Houston — The Electric Reliability Council of Texas, market participants and regulators would face big changes under bills advanced by the Texas Legislature March 29-30, including power and gas weatherization requirements, a new "emergency pricing program" and ancillary service charges for wind and solar facilities.

On March 30, the state House of Representatives passed by wide margins the following house bills:

• 10: Restructures the ERCOT board so that the unaffiliated member positions are eliminated, replaced by appointees of the governor (three), the lieutenant governor (one) and the speaker of the House (one), all of whom must be Texas residents and unpaid, except for expenses.
• 11: Requires the Public Utility Commission of Texas to require each generator to prepare to provide sufficient power in an extreme weather emergency, hot or cold.
• 12: Establishes a statewide disaster alert system for events such as widespread power outage lasting longer than 24 hours.
• 13: Establishes a Texas Energy Disaster Reliability Council to prevent extended power outages caused by disasters, manage such emergencies, coordinate fuel delivery to electric generators, monitor supply chains for the electric grid, and recommend methods to maintain grid reliability, including maintaining gas supply networks.
• 16: Prohibits the sale of wholesale indexed electricity products to residential consumers.
• 17: Prohibits any regulatory authority or political subdivision from banning, limiting or discriminating for or against a utility service based on the type or source of energy to be delivered to the end-user.

A power market analyst who asked to remain unidentified described House Bill 10's Texas residency requirement as "silly."

"I have no concerns with replacing the unaffiliated board members with political appointees," the analyst said in a March 30 email. "However, removing any qualifications (corporate management, regulatory experience, accounting, risk management, etc.) seems problematic. Maybe not for this governor, but what about future ones? [I'm] also intrigued by the lack of compensation -- makes me skeptical about the caliber, interest and motivations of potential appointees."

Senate bill goes further

Senate Bill 3, unanimously approved March 29 by the Senate, contains provisions similar to House measures, such as establishing a Texas Energy Reliability Council, requiring generators to prepare to operate during a weather emergency, establishing a statewide energy disaster alert system and banning wholesale indexed electricity sales to residential customers.

But Senate Bill 3 goes further, including the following:

• Requires the TERC to map the natural gas supply chain to designate priority service needs during extreme weather events;
• Requires gas supply chain facility operators to prepare to operate during a weather emergency, with the potential fine of up to $1 million/offense for noncompliance;
• Requires a reliability monitor certified by the Electric Reliability Council of Texas to check for compliance with weatherization standards and directs the PUCT to set potential noncompliance penalties;
• Prohibits the sale of wholesale indexed electricity products to small commercial consumers;
• Requires power utilities and retail electric providers to inform consumers about load-shedding procedures and how to be considered a critical-care customer;
• Requires intermittent generation (wind and solar) to buy ancillary services and replacement power sufficient to manage net load variability;
• Requires load-shedding exercises to be conducted at least once a year;
• Establishes an "emergency pricing program" – compensating generators based on actual costs -- which would become effective if the $9,000/MWh high systemwide offer cap, known as the HCAP, has been in effect for 12 hours within a 24-hour period;
• Limits the price of ancillary services to 150% of any HCAP or emergency pricing;
• Limits the low systemwide cap ($2,000/MWh or 50 times a natural gas fuel index price) to no more than the HCAP; and
• Requires registration for non-residential distributed generation.

Industry observer reactions

In a March 30 email, Giuliano Bordignon, an S&P Global Platts Analytics power and gas analyst, said the gas supply chain requirements rule could have made a difference this past February, "as a fine of up to $1 million per offense (per day, as detailed in the bill) for noncompliance looks like a steep price to pay."

Beth Garza, a senior fellow at the R Street Institute, a nonpartisan public policy research organization, who until recently headed Potomac Economics' independent market monitor office for ERCOT, said the emergency pricing program, in effect, has the state Legislature set the public's value of lost load, which she said is "helpful."

"But without careful and thoughtful implementation, the proposed mechanism may result in an unsustainable wholesale market because enough revenue would not be generated to support the addition of needed generation capacity," Garza said in a March 30 email. "The tricky part will be determining the conditions under which HCAP should be reinstated. ... This question has appropriately been left for PUCT deliberations."

Beau Freyou, a Houston-based energy broker at ICAP, said the bills approved this week "are fine for winter, but none of these proposals will incentivize building new gas plants, which is what is needed."

Platts Analytics' Bordignon said the emergency pricing "could have made a difference" this February, but it would not have affected any previous similar situations going back to 2011.

"Only August 2011 and this past February fall within the constraints, and in August 2011, such high prices were non-contiguous, which leaves only this year as the applicable period, hardly enough to make a difference for investments" Bordignon said.

Garza said assigning ancillary service cost to intermittent resources is "a bad idea," as ERCOT's ancillary service costs have decreased "even with the large influx of intermittent generation."

"ERCOT should determine the quantity of [ancillary services] required to ensure reliable operation for all loads, given all generation," Garza said. "Those costs are best borne directly by loads. By keeping the allocation simple and direct, loads will pay the lowest cost for those services rather than a generator's risk adjusted approximation of those costs."