{"id":3216,"date":"2014-04-30T14:13:38","date_gmt":"2014-04-30T19:13:38","guid":{"rendered":"http:\/\/www.texaselectricityratings.com\/blog\/?p=3216"},"modified":"2014-04-30T14:13:38","modified_gmt":"2014-04-30T19:13:38","slug":"puc-vote-important-small-fish-texas-electricity-exemption-rule","status":"publish","type":"post","link":"https:\/\/www.texaselectricityratings.com\/blog\/puc-vote-important-small-fish-texas-electricity-exemption-rule\/","title":{"rendered":"PUC to Vote on Important “Small Fish” Texas Electricity Exemption Rule"},"content":{"rendered":"

ERCOT is set to vote on an amendment to a rule that is commonly known as the \u201cSmall Fish Swim Free\u201d 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<\/a>, from the generators all the way down to the average residential electricity<\/a> customer. So what is this \u201cSmall Fish\u201d rule, and how does it affect day to day market behavior and retail consumers? Let\u2019s take a look.<\/span><\/span><\/p>\n

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 \u201clegally\u201d be seen as not having any \u201cmarket power.\u201d As a result of this Small Fish exemption and legally being seen as not having \u201cmarket power,\u201d qualifying generation companies can operate according to a different rules than companies such as NRG or Luminant. Specifically, a \u201cSmall Fish\u201d 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<\/a> 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\u2019s 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<\/a> thousands of dollars at will, depending on the circumstances.<\/span><\/span><\/p>\n

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\u2019s ERCOT, 5% of the energy generation on the market comes out to just over 4,000 megawatts of capacity. That\u2019s 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. <\/span><\/span><\/span><\/span><\/p>\n

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\u2019s pretty meaningless.\u00a0 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. \u00a0Most of the time it\u2019s meaningless but then sometimes it\u2019s critical.\u00a0The point is, the notion that something as \u201csmall\u201d as 5% of a market has \u201cno power\u201d 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\u2019s opportunistic to them is a large advantage in a times where markets are supposed to becoming more fair for everyone.<\/span><\/span><\/span><\/span> Of course, this is only a problem if it’s actually occurring with any kind of frequency. From an article in Platts:<\/p>\n

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 \u201csmall fish\u201d 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 \u201csmall fish\u201d 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\u2019s presentation, GDF Suez, which has about 3,957 MW of capacity spread across ERCOT\u2019s 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 \u201csmall fish\u201d in his presentation raised prices on substantial portions of its capacity near the systemwide offer cap. \u201cHow can it be a competitive and efficient market if there\u2019s one party who is pushing prices around like this?\u201d de Man asked.<\/p><\/blockquote>\n

In other words, during the hottest times of the year, one electricity generator listed as a \u201csmall fish\u201d 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\u00a0<\/span><\/span>former Independent Market Monitor, Dan Jones<\/span><\/span><\/span>, agrees with the statement about abuse. From the same Platt\u2019s article:<\/span><\/span><\/span><\/span><\/p>\n

Dan Jones, who heads Potomac Economics\u2019 independent market monitor operation at ERCOT, said his staff would consider the type of activity described in de Man\u2019s presentation \u201ceconomic withholding.\u201d \u201cBut per [PUC] rules, it\u2019s not market power abuse, because you have to be an entity that has market power, and by the rule, entities that don\u2019t have 5% [of total capacity] do not have marketwide market power,\u201d Jones said. \u00a0 Jones noted that his State of the Market Report for 2012, issued in June, mentioned that a \u201clarge \u2018small fish\u2019\u201d could be \u201cpivotal.\u201d<\/p><\/blockquote>\n

So let\u2019s recap: The traders think it\u2019s 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 \u201csmall fish\u201d could absolutely be, in his own words, \u201cpivotal.\u201d \u00a0<\/span><\/span><\/span><\/span><\/p>\n

So what is left to debate here, exactly?<\/span><\/span><\/span><\/span> 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.<\/span><\/span><\/span><\/span><\/p>\n

There is plenty more we can examine about this situation. For starters, if this is a punishable offense (regardless of the \u201csmall fish\u201d rule or not) then why aren\u2019t any guilty parties being punished? <\/span>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\u2019t 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<\/a> marketplace to make sure everything is operating above board.<\/span><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

ERCOT is set to vote on an amendment to a rule that is commonly known as the \u201cSmall Fish Swim Free\u201d 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 Read More<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_mbp_gutenberg_autopost":false},"categories":[1],"tags":[],"yoast_head":"\nPUC to Vote on Important "Small Fish" Texas Electricity Exemption Rule - Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.texaselectricityratings.com\/blog\/puc-vote-important-small-fish-texas-electricity-exemption-rule\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"PUC to Vote on Important "Small Fish" Texas Electricity Exemption Rule - Blog\" \/>\n<meta property=\"og:description\" content=\"ERCOT is set to vote on an amendment to a rule that is commonly known as the \u201cSmall Fish Swim Free\u201d market exemption. 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