PUC to Vote on Important “Small Fish” Texas Electricity Exemption Rule

ERCOT is set to vote on an amendment to a rule that is commonly known as the “Small Fish Swim Free” market exemption. As much as that might not sound like a big deal, this vote actually should have huge ramifications for the entire industry of electricity in Texas, from the generators all the way down to the average residential electricity customer. So what is this “Small Fish” rule, and how does it affect day to day market behavior and retail consumers? Let’s take a look.

The Small Fish Rule states, in short, that unless an energy generation company represents at least 5% of the total market generation they are deemed by the Public Utility Commission of Texas to “legally” be seen as not having any “market power.” As a result of this Small Fish exemption and legally being seen as not having “market power,” qualifying generation companies can operate according to a different rules than companies such as NRG or Luminant. Specifically, a “Small Fish” company can choose to do things differently, legally. This in turn can cause a chain reaction in elevating the per-unit cost of electricity to retail electricity companies or other firms purchasing power. If an advantageous situation arises where a Small Fish can affect the outcome of the price of wholesale power, it is possible for them to use their actual (although not legally recognized) market power on a moment’s notice. And unbeknownst to all other market participants, raising their offer curves from cost can bump up prices to the price cap of $5000. You can see how the ability to do either could be very powerful if one company had the ability to change the whole-sale electricity prices thousands of dollars at will, depending on the circumstances.

The existing law is dependent on the concept that someone with less than 5% of the total installed capacity indeed has no market power. In other words, nothing they do can affect the whole electricity market in total, particularly in resource adequacy or pricing. Of course, on the face of it, this is a somewhat absurd comment. In today’s ERCOT, 5% of the energy generation on the market comes out to just over 4,000 megawatts of capacity. That’s a very robust amount of capacity, and significantly more capacity than the difference between Texas being put at risk for rolling blackouts and operating with ample breathing room.

To put things in perspective, lets consider an analogy to a gas station after a hurricane. You can have less than 5% market share of a cities gasoline market and during normal times it’s pretty meaningless.  But then a hurricane comes in and devastates the city and suddenly demand shoots up, and then you offer your gasoline at $10 a gallon because you know people will pay for it.  Most of the time it’s meaningless but then sometimes it’s critical. The point is, the notion that something as “small” as 5% of a market has “no power” is a roundly incorrect one. Often times, the amounts of megawatts between $100 and the price cap of $5000 is often in the hundreds of megawatts so the ability to influence prices whenever a generator feels it’s opportunistic to them is a large advantage in a times where markets are supposed to becoming more fair for everyone. Of course, this is only a problem if it’s actually occurring with any kind of frequency. From an article in Platts:

In a presentation about the NPRR to the committee, Patrick de Man, speaking for Raiden Commodities, said that on 17 days from June through early September, such a “small fish” had raised the price on a substantial part of its fleet capacity near the systemwide offer cap, which has been $5,000/MWh since June 1. De Man did not name the “small fish” in question either in his presentation or in his discussion, out of concern that it might be considered in violation of federal antitrust laws. A Platts analysis showed that on nine of the days cited in de Man’s presentation, GDF Suez, which has about 3,957 MW of capacity spread across ERCOT’s Houston, North and South hubs, priced between 564 and 1,332 MW of electricity between $4,900 and $5,000/MWh. De Man said that locational marginal price spikes correlated strongly with the times that the “small fish” in his presentation raised prices on substantial portions of its capacity near the systemwide offer cap. “How can it be a competitive and efficient market if there’s one party who is pushing prices around like this?” de Man asked.

In other words, during the hottest times of the year, one electricity generator listed as a “small fish” was consistently raising their prices near the maximum offering cap allowed, in turn effecting the pricing for everyone when they deemed it was advantageous for them. When speaking with several people who work in trading, they readily admit off the record that this kind of thing happens, that it makes their job nearly impossible to value the price of electricity, and that its most certainly market abuse. Markets need to be fair to create competition and attract capital deployment. When they are in fact not fair, then that said market breaks down. This is what is occurring right now in Texas. In fact, the former Independent Market Monitor, Dan Jones, agrees with the statement about abuse. From the same Platt’s article:

Dan Jones, who heads Potomac Economics’ independent market monitor operation at ERCOT, said his staff would consider the type of activity described in de Man’s presentation “economic withholding.” “But per [PUC] rules, it’s not market power abuse, because you have to be an entity that has market power, and by the rule, entities that don’t have 5% [of total capacity] do not have marketwide market power,” Jones said.   Jones noted that his State of the Market Report for 2012, issued in June, mentioned that a “large ‘small fish’” could be “pivotal.”

So let’s recap: The traders think it’s market abuse, and the former man in charge of making sure there are no abuses believes it would be abuse if it was performed by anyone with 5% of the market. He also went on record saying that a “small fish” could absolutely be, in his own words, “pivotal.”  

So what is left to debate here, exactly? And none of this above even touches on another strategy that can be used in this situation, physical with-holding. Physical with-holding is a strategy Enron used in California to increase prices by making available units unavailable creating shortages in capacity thus driving up prices, and some traders I have talked with have actually filed complaints with the IMM and the PUCT only to be told that any behavior out of one entity in question is not up for discussion as they have immunity. But we’ll look closer at physical with-holding in another article.

There is plenty more we can examine about this situation. For starters, if this is a punishable offense (regardless of the “small fish” rule or not) then why aren’t any guilty parties being punished? By implementing this amendment, it removes the possibility of any of these energy generators from effecting prices in the way they have in the past. It makes the point moot. And besides, why shouldn’t smaller generators have to play by the same rules as the larger generators? What positive purpose does the exception serve anyway? All in all, it just makes sense to create a level playing for all parties, and thus create even more transparency in the Texas electricity marketplace to make sure everything is operating above board.

Champion Energy’s Scholarship Program

Champion Energy, the four time consecutive winner of the J.D. Power Award for excellence in customer service in the Texas electricity space, has announced their new Champion Scholars Program. The program, which continues Champion Energy’s commitment to community service and philanthropy, will award scholarships to one winner ($5,000) and two runners up ($1,000), respectively.

The scholarship application centers on community involvement, including the following essay topic:

“Being a champion is about more than winning or being number one. Sometimes being a champion is about giving back to the community, standing up for your beliefs, or supporting a cause you believe in. What makes you a champion in your school or in your community?

Applications are due by April 1st, and winners will be announced by May 1st. It’s also important to note that the scholarships are applicable not just to college, but also High School scholarships. Anyone interested in applying for the scholarship can get the application at the following link:

Champion Scholars Application Link

Texas Electricity Complaints Continue to Decline

Customer complaints in the Texas electricity market have declined for the fourth straight year, as reported by multiple news outlets including the Ft. Worth Star-Telegram. Complaints are once again the lowest since deregulation began in 2002. Naturally, Recharge Texas (TCAP) once again continued to further their agenda by pointing out there were less complaints during the regulated days of Texas electricity.  I’ve discussed this lazy, Continue reading “Texas Electricity Complaints Continue to Decline” »

More on Texas Electricity & Capacity Markets

The debate over capacity markets and whether or not they will become a model for Texas electricity continues to rage. I’ve already given you my thoughts on a Capacity market in my primer on the subject. But more information from all sides continues to blast out from all interested parties. First was the release of an NRG study that admitted that a capacity market would cost Texans an additional 4.7 billion dollars per year. Of course, NRG who would love a capacity market, indicated much of that money would be recouped. Fortunately, Paul Ring of Energy Choice Matters quickly debunked that notion in his article last week.

Of course, the biggest claim of the power generators is that they simply aren’t making enough money to warrant investment as long as natural gas prices continue to remain low. And this is despite raising the market cap last year (with more raises in the pipeline) precisely to encourage investment in new generation plants.

Of course, despite claiming not enough profits, large generation companies sure seem eager to PLAN new plants, according to this article in Rueters

Power companies in fast-growing Texas are drawing plans for 20 new generation plants, even though most projects cannot be financed because of a standoff between state regulators over how to reform the state’s $29 billion electricity market.

Of course, to me, “cannot be financed” reads more like “waiting to see if they can squeeze more money out of taxpayers.” But I might be cynical. What I really did enjoy was later in the article, this little snippet:

Panda Power Funds of Dallas, considered a maverick among developers, overcame significant financing hurdles this year to begin construction of two natural gas-fired plants totaling 2,200 MW.

In the world on power generation, Panda Power is a small guy. And yet this little guy managed to find financing to build two new plants in Texas despite the current “stalemate.” One would think mega companies such as NRG or Just Energy wouldn’t have any difficulty securing financing for new plants. In fact, they wouldn’t. They just want more profits. It’s funny how Panda is “considered a maverick” when the only thing they’re doing is creating supply where there is need for demand.

Anyway, the debate over a capacity market will continue to rage. Hopefully Rick Perry’s newest appointment to the PUC, former Chief of Staff Brandy Marty, will bring common sense to the discussion and eventually get capacity markets tossed out. Fingers crossed.

Direct Energy Purchases Bounce Energy

This morning Direct Energy has announced their purchase of Texas retail electricity provider Bounce Energy. Bounce Energy, who has consistently been at the top of the Texas Electricity Ratings rankings (currently #1), has easily been the most innovative electricity provider in the country in terms of their online technology/capabilities and their success in reaching out to potential and existing customers through social media outlets.

Additionally, just recently, Bounce made groundbreaking contributions to the electricity space with the launch of their new MyAccount functionality, as well as their Build Your Own Plan functionality. The Build Your Own Plan is the only one of it’s kind in the electricity space, and allows customers to select their own plan term length, the amount of renewable energy in the plan, whether they want automated and paperless billing, and more.

In contrast, Direct Energy has long been lacking in the realm of online functionality, digital customer outreach, and a customer friendly web-portal. So on the surface, this seems like a very smart purchase by Direct Energy, but only if it’s viewed as a strategic purchase of specialists and experienced personnel to bolster some trouble areas of their business. If it is just viewed as a purchase of a customer book, then I’d purport that Direct Energy is wasting a great opportunity.

Fortunately, from some of the quotes in the press release, it looks like Direct Energy is very much viewing this as a strategic purchase:

“We are always looking for new ways to enhance our customers’ experience and satisfaction,” said Steven Murray, President of Direct Energy Residential. “Bounce Energy’s digital marketing insights and e-commerce platform will bolster our capabilities as we expand our product offerings to current and potential customers.”

 

“Direct Energy is the ideal organization with which to expand our e-commerce platform and digital marketing capabilities,” said Robbie Wright, CEO of Bounce Energy.

If that is the case, and by all appearances it seems to be a strategic purchase, this is great news for both Direct Energy and Texas electricity customers alike. Bounce’s technology and marketing savvy along with Direct Energy’s resources (which allow them to go toe to toe with incumbents like TXU and Reliant), could create the kind of Texas electricity company that will push innovation in new ways that will only benefit Texans, as well as customers in all other states Direct Energy sells electricity.

All in all, it’s a very interesting day for Texas electricity customers. The #7 company on Texas Electricity Ratings is purchasing the current #1 company, but there’s a lot of hope that the union will mean great things for customers. Congratulations to both Direct Energy and Bounce Energy!

Power Generators Continue Campaign to Squeeze Texas Electricity Customers Dry

In a turn of events that stuns absolutely no one, the energy generators in the state of Texas are once again attempting to leverage more money from the customers and retail electricity providers to line their pockets. And naturally, they are using the alleged, worst case scenario of an “energy shortage” in Texas and the fears surrounding it as their vehicle to increased profits. From the DMN article: Continue reading “Power Generators Continue Campaign to Squeeze Texas Electricity Customers Dry” »

PUC Continues to Drop Ball on Consumer Advocacy?

I revieve reader questions on a regular basis about how the PUC handles their ranking system. The general thrust is “I see there is a state rankings system for Texas electricity, but it looks dated.” Or “I don’t see the electricity provider that I’m interested in listed on the PUC’s page. What gives?” I wrote an article in early November about some serious flaws and confusing inconsistencies in how the PUC updates and lists the Texas retail electricity providers (REPs) in their complaint scorecard in attempt to address some of these FAQs. I then posted an update in early January pointing out that yet again the PUC had fallen behind and failed to update their complaint scorecard. I’m not sure what the problem is, but  Continue reading “PUC Continues to Drop Ball on Consumer Advocacy?” »

Texas Electricity Ratings: Rankings Update 2/19/13

We’re well into the new year, and it is time for a new update of our rankings here at Texas Electricity Ratings. We’ve had rate changes now that companies are preparing to move back into summer rates, and there’s also been another round of customer reviews that I’ve entered into my system. So with that in mind, here’s our latest round of rankings:

Bounce Energy                        4.04
Champion Energy Services     3.91
StarTex Power                         3.81
TriEagle Energy                       3.69
Gexa Energy                            3.58
Direct Energy                           3.17
Amigo Energy                          3.09
Tara Energy                             3.02
Green Mountain Energy           2.79
TXU Energy                              2.53
Texas Power                            2.46
Reliant Energy                          2.13

Congratulations to Bounce Energy, who is back in the top spot! Bounce is followed by Champion Energy, who slipped a little but during this rankings system. StarTex Power has slipped back into the 3rd spot, even after their purchase by Constellation Energy. That speaks well to how they’ve been transitioned into Constellation.

During my rankings update, I’ve also noticed some more things about the Power To Choose website rankings, but that will be another post I’ll put up later today or tomorrow.

Texas Electricity News & Notes 1/10/2013

There were a couple of news items that hit the Texas electricity market this week. Neither of them on their own require enough analysis to warrant an entire blog post, so I’m going to stick them together in this one blog post. First up,  Continue reading “Texas Electricity News & Notes 1/10/2013” »

Champion Energy Wins 3rd Straight JD Power & Associates Award

Late last week it was announced that Champion Energy won the 2012 JD Power & Associates survey for customer satisfaction. This marks the third consecutive ear that Champion Energy has won the award, which is an outstanding achievement and really demonstrates their commitment to customer service and satisfaction. Champion Energy is the first electricity provider to win the award for three consecutive years.

Champion Energy got perfect scores on 3 of the 4 grading criteria that JD Power measured, which are Billing & Payment, Price, Communications, and Customer Service. Their total score was 756 out of a possible 800, improving on their 2011 score of 745. The Texas electricity industry average score was 678, which Champion exceeded by 78 points. Again, congratulations to Champion Energy.

Also performing well was relative market newcomer, Bounce Energy, which was founded in 2008. Bounce Energy was the only other Texas electricity provider to score the top 5 point ranking with a total score was 745. Bounce’s performance is particularly impressive when you consider that they are the youngest company on the survey to be included. Additionally, this was just their second year to be included in the survey at all, finishing last year with 681 points. So Bounce Energy also deserves a well-deserved congratulations for moving into a very strong 2nd place finish in just their second year in the JD Power survey.

StarTex Power had another great showing, finishing third with a total of 729 points. Also of interest to me was that both market incumbents and big name providers Reliant Energy and TXU Energy finished with marks below the industry average with scores 669 and 663, respectively.

The survey results weren’t the only things I found interesting in the press release, which also spoke about the general satisfaction with Texas electricity customers when compared to consumer satisfaction in regulated markets without choice. I’ll take a closer look at that this afternoon in a separate article. Full results below.