June 28, 2012 / 6:07 PM / 7 years ago

UPDATE 1-Texas regulators raise power price cap by 50 percent

By Eileen O’Grady

HOUSTON, June 28 (Reuters) - Texas electric regulators voted Thursday to raise the price cap for wholesale power by 50 percent, beginning in August, to send a message that the state needs additional generation soon to meet growing power needs.

The Public Utility Commission of Texas voted 2-0 to increase the market cap when supplies are tight to $4,500 per megawatt-hour from $3,000 per MWh to encourage new investment in power plants to supply the $34-billion wholesale market.

The higher price cap for real-time power, which takes effect in August, is viewed as an interim step ahead of an even higher cap of $7,500-$9,000 for 2013 and beyond, which the commission is expected to act on later this year.

“It is important to send a strong signal at this time,” said PUC Chairman Donna Nelson during Thursday’s open meeting, which was web cast. “One thing we can’t do is ignore this and move forward blindly and have faith that we will have enough electricity.”

The Electric Reliability Council of Texas (ERCOT), which oversees the power grid serving most of the state, has warned that there will likely be more rolling blackouts in the coming years as power supply struggles to keep pace with demand.

After a power-plant construction boom in Texas in the early 2000s, low-cost natural gas and tight financial markets have stalled new investment in generation. At the same time, stricter federal environmental rules are expected to force older, dirtier coal-fired power plants to shut.

Power plant developers say it’s already too late to add new generation by 2014, when ERCOT says power reserves will drop below 10 percent.

The state’s supply was tested this week when an early heat wave pushed peak-hour electric demand in Texas to record levels for June or July, and raised wholesale prices to the current cap of $3,000 briefly on Tuesday.

In 2011, Texans consumed a record amount of electricity, particularly over the summer when air conditioners ran for extended periods during the hottest summer on record. ERCOT declared emergencies on a half dozen days last August, narrowly avoiding the need for rolling power outages.

Commissioner Rolando Pablos said he voted to raise the price cap in the interests of the state and not of any particular special interest group.

“Energy prosperity leads to economic prosperity,” Pablos said. “A robust and reliable electric system will help us get there.”

While companies that generate power support the higher price cap, groups representing large industrial power users, electric retailers and consumer groups opposed it, saying it would only raise costs without a guarantee that new plants will be built.

Some groups said other market adjustment made by ERCOT since 2011 were sufficient to maintain reliability this summer, according to PUC filings.

Several Texas lawmakers said the commission needed to take more time to understand how the higher price cap will affect retail prices.

“If last summer taught us anything, it is to hope for the best but plan for the worst,” Nelson said.

Although Commissioner Ken Anderson also supports a higher price cap, he abstained from Thursday’s vote, on worries that companies that buy power in the wholesale market won’t have time to adjust hedging strategies or additional collateral requirements by August.

“However, I am mindful, the market has a huge expectation for this,” Anderson said. “We absolutely need a higher system-wide offer cap.”

The commissioners disputed arguments that the higher cap will dramatically impact power bills for most customers.

Retail rates are at historic lows, Nelson said in a memo, noting that electric prices today are much lower, when adjusted for inflation, than rates charged in 2001 before the state moved to a competitive market for generation.

Power producers in Texas include Luminant, a unit of privately held Energy Future Holdings, NRG Energy , Calpine Corp, NextEra Energy and Exelon Corp.

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