Are Voluntary Mitigation Plans a License To Steal?Posted on There's been lots of controversy over the PUC's acceptance and adoption of NRG's Voluntary Mitigation Plans (VMP). And it is all justified. The Houston Chronicle's chief Business and Energy columnist, Loren Steffy, wrote an article on recently blasting this move as against the interest of consumers and where one energy expert he quoted called the move "a license to steal" by the electricity generators. Steffy even went so far as to suggest that the Public Utilities Commission remove the "Public" from their name since their actions this summer have shown that despite their primary mandate of protecting consumers, their actions seem to indicate little regard for the Public they're supposed to be serving. First off, however, lets explain what exactly VMPs are and how they work. What is a Voluntary Mitigation Plan? In short, a VMP is an agreement between a power generator, like NRG, and ERCOT that details the specific conditions and environments under which generators will bring their power online onto the Texas grid. The VMPs will also determine at what prices the generators will bring their power online to the market. What does that mean? It means that under the right set of circumstances the PUC is allowing for the creation of what is effectively a price floor for generators that will guarantee them certain minimum prices, even if the electricity market itself would dictate much lower rates. It could also guarantee a timeline as well, which could quite easily prolong the window of higher prices past what the market itself would dictate. In summation, under these rules a generator will be able to determine when they bring their power online and at what price, as opposed to letting the free energy market (which by the way is how the ENTIRE Texas electricity market was designed to operate) determine the energy rates. In fact, from the very words of the proposed agreement:
This Plan creates a safe harbor for NRG to offer its generation resources to the market without business risk and uncertainty that an offer made consistent with the Plan will become subject to a Commission enforcement action for market abuse by economic withholding.So the customers have to play the market, and the Retail Electricity Providers (REPs) have to play the electricity market, but the energy GENERATORS can now be exempt of any kind of business risk and business uncertainty. Now electricity generators can guarantee their minimum profits while still being able to maximize profits during periods of scarcity with the newly increased price cap. They have the best of both worlds. But if you think that was unfair, notice the last part of the quote above...NRG won't be subject to enforcement of any accusations of economic withholding. Does that read like a Get Out of Jail Free card to anyone else? It should, because the very next line of the agreement says the following:
Adherence to this Plan, while it remains effective, shall provide NRG with an absolute defense against allegations of abuse of market power through economic withholding with respect to the specific behaviors addressed by the Plan. Should NRG not follow the approved Plan, it will have no absolute defense against any allegations of market power abuse. Failure to adhere to a plan approved by the Commission does not, of itself, constitute a violation of P.U.C. SUasT. R. 25.503(g)(7).So as long as the generators bring the power online at the specific price points when certain thresholds are reached, the generators are completely immune to any accusations of energy withholding. At least as long as the PUC agreed to the terms in advance. Now, not only can they generators guarantee minimum profits, they will also be able to operate without any business risk, and they can't even be investigated, fined, or prosecuted for withholding and market manipulation...just as long as they do it within the accepted boundaries of their agreement. Who Will This Effect? Everyone who isn't a power generator. Just like the PUC's earlier decision to raise the Market Cap Pricing, this rule will negatively effect ALL customers in Texas in the form of increased pricing. Additionally, any REP that doesn't have any affiliation with a generator is also likely to suffer. Companies like Reliant (owned by NRG), TXU (owned by Energy Future Holdings), and Direct Energy will have an advantage over other companies that don't have any generation assets. In fact, there's a distinct possibility that this move could cause many REPs to actually exit the Texas market. If the cost of business becomes too high for REPs, especially ones without ties to power generation assets, then like any market businesses will leave and focus on other states where the playing field isn't being tipped in favor of power generators. This would be extremely ironic considering that for years now Texas has been viewed as the ideal model of a functioning deregulated electricity market. Every new state that has deregulated in the past 5 years has cited Texas as a successful model which they hope to emulate, at least before the PUC started meddling in affairs. And yet now the market that has been so roundly applauded for it's success could suffer REPs simply stopping doing business in this state because the PUC is basically willing to serve up the entire market on a platter to the power generators. Or course, Donna Nelson, the Chair of the PUC has foreshadowed about how an exodus REPs would be explained away to Texans. It won't be difficult to say that any company deciding to discontinue business in Texas were probably poorly funded, or they couldn't meet their minimum credit requirements with ERCOT. I'd personally find it funny if a bunch of medium-sized REPs who have been effectively operating in Texas for years suddenly ran into "funding" issues and had to leave Texas. That wouldn't be yet another interesting coincidence at all, right? Coincidences seem to be going around a lot lately. I do know that few people would argue that having our current robust roster of 80 or more active REPs functioning in Texas shrinking down to 5 or 10 would hardly be seen as a "healthy" market with great consumer choices available. Why would the PUC do this? That is the million dollar question. Why would an agency with the mandate of protecting Texans from any kind of market collusion and price gouging, make a string of decisions that all but guarantee customer prices skyrocketig over the course of the next 12 months? Additionally, why would they make these changes now when customers and REPs alike agree that the Texas electricity market is settling into a good place where everyone is happy? Fear and panic is the most logical answer. The fear and subsequent panic comes from a quixotic desire to prevent rolling blackouts. Of course, the PUC might be overreacting. The looming power crisis in Texas is a very real thing with the states population increasing by 20% since 2005. During that time, very little new power generation as come online, moving us consistently closer to our targeted reserve margin. Of course, despite seeing the population increase over the years, the PUC did little forward-planning on enticing investments for new generation even when natural gas prices were high. Then fast forward to last summer, where the worst drought and hottest summer in over 200 years pushed Texas dangerously close to rolling blackouts. Ever since then, the PUC and ERCOT have been panicking about the possibility of rolling blackouts, despite the fact it took a 200 year summer and almost unprecedented state population growth to get us to that brink. As a result, the PUC has been making a string of knee-jerk and poorly thought out decisions to try and lure new power generation to Texas to make keep the lights on, so to speak. But while Texas needs to lure in generation, it doesn't need to do it haphazardly and without thoughtful consideration. The PUC ordered a study of the market by the Brattle Group, but decided to move ahead with raising the price cap before the report was even released. And now they've offered special Voluntary Mitigation Plans where the generators can cut deals that will not only guarantee them certain profits ahead of what the market would dictate, but it will also protect them legally from any market manipulation they might engage in to maximize their profits...as long as the manipulation is within "acceptable levels" the PUC has agreed to beforehand. With this kind of license to guarantee profits, what generator wouldn't line up to invest in Texas? Even if it forces REPs to exit the market and the residents of Texas to bear the brunt in the form of high prices? But hey, at least Donna Nelson won't be blamed for rolling blackouts. Personally, I don't own stock in NRG or Calpine, but given the recent set of decisions by the PUC and some of the things PUC member Kenneth Anderson said earlier in the year during an open meeting about generators being able make money not by the wheelbarrow, but by the truckload, I'm reconsidering. Making an investment in a major energy generator is starting to seem like a smart investment. A smart investment I might try to make, considering everything the PUC appears willing to do to guarantee their profits. At the very least it seems like the best strategy to earn back some of the money they'll be taking directly from us in the form of increased electricity prices.