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

Posted on Posted in Consumer Advocacy, Deregulated Electricity, PUC/ERCOT, Texas Deregulated Electricity, Texas Electricity, Texas Electricity News

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.

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