UPDATE 1-Lawmaker says Texas agency moving too fast on power market reform

Mon Nov 25, 2013 7:22pm EST

HOUSTON Nov 25 (Reuters) - A powerful Texas legislator told state regulators at a hearing on Monday that they are moving too quickly to reform the $29 billion wholesale power market, saying they should not take major steps without input from lawmakers.

Texas Sen. Troy Fraser, chairman of the Texas Senate Committee on Natural Resources, urged the three-member Texas Public Utility Commission (PUC) to "slow down."

Fraser called the hearing after the PUC late last month took an initial step that observers believe will lead to creation of a so-called "capacity market" to bolster state electric reserves at an annual cost of $4 billion or more, Fraser said.

After months of delay, two of three PUC commissioners said they support a mandatory reserve margin as a cushion against blackouts, rather than the current "target" reserve of 13.75 percent.

"I am asking the PUC to slow down," Fraser said at the end of Monday's hearing. "You are making votes you should not be doing. The Legislature needs to weigh in."

Capacity markets are used in other U.S. power markets and many power generators say Texas needs such a construct to raise wholesale prices to the level needed to allow construction of new power plants.

Creating a capacity market in Texas would mark a major change from the existing "energy-only" market that pays generators only when they produce power.

Fraser said he doesn't believe the PUC has the authority to drastically reform the current market. "Where they are going now, they have totally left the Legislature out and are working in a vacuum," he said.

He said a capacity market would not only add unneeded cost, but be complex and time-consuming to implement.

PUC members agreed to do a cost-benefit analysis before finalizing other market changes.

"My request is to have regulatory tweaks that are easy to put in place and see if they work," Fraser said.

Calling the capacity market a "subsidy" for generators, Fraser suggested Texas could follow the lead of New Jersey and other states that have proposed building power plants outside the capacity market. Those efforts are tied up in legal challenges.

"State-owned facilities in a competitive market do a disservice and distort the market," said John Fainter, president of the Association of Electric Companies of Texas, which represents power-plant owners. "That's not sound policy."

The state's power industrial sector, including petrochemical companies, oppose capacity markets. Representatives from Valero Energy Corp and Wal-Mart Stores Inc testified Monday.

"A convincing argument for the capacity market has not been made," said Chris Hendrix, who oversees electric procurement for Wal-Mart. "The dire warnings of (the grid agency) about blackouts are overdone."

"We don't want to import a model that has failed," said Tony Bennett, president of the Texas Association of Manufacturers (TAM), following the hearing.

TAM has proposed another less drastic measure to address a reserve margin shortfall in a less costly manner, Bennett said.

Power plant owners in the state include Luminant, a unit of Energy Future Holdings, which is owned by Kohlberg Kravis Roberts & Co LLP and other private equity firms; NRG Energy, Calpine, NextEra Energy Inc and Exelon Corp.

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