Texas moves to bolster state power reserve; generators' shares rise

Reuters

By Eileen O'Grady

HOUSTON, Oct 25 (Reuters) - Texas regulators on Friday movedto create a mandatory reserve margin for electricity to reducethe prospect of blackouts, a change that may signal marketreform that benefits the bottom line of power suppliers whileraising costs for end users.

Two of the three members of the Texas Public UtilityCommission (PUC) on Friday said they support a mandatory reservemargin, rather than a "target" reserve margin that doesn'tencourage companies to invest in new power plants to supply the$29 billion wholesale market.

The state's primary grid, the Electric Reliability Councilof Texas (ERCOT), currently has a 13.75 percent "target" reservemargin, a generating surplus as a cushion against blackouts.

Electricity use in Texas has been growing faster thangeneration is being built, shrinking the reserve margin andincreasing the prospect of rolling outages when supplies arestretched, the grid operator has warned.

The signal that Texas will have a mandatory reserve margin isviewed by market watchers as a likely first step toward creationof a so-called "capacity market" where generators and others arepaid to be available in the future.

That would be a major change from the existing "energy-only"market that only pays generators when they produce power.

Generating companies generally favor a capacity market.Shares of power producers NRG Energy and Calpine Corp rose 7 percent after Friday's PUC meeting.

Loans related to companies that own Luminant, the state'slargest generator, also traded higher on the PUC news.

Large industrial power consumers and other groups oppose theadditional cost that a capacity market may create.

NO FORMAL VOTE TAKEN

The PUC has been studying the state's electric "resourceadequacy" problem for more than two years.

On Friday, Brandy Marty, the newest member of thethree-member commission, backed Chairman Donna Nelson to supportthe move to a mandatory reserve margin although no formal votewas taken.

"I would support a mandatory reserve margin," Marty said, inher first decisive comments since joining the agency in August.

Marty's action appeared to end a stalemate between Nelsonand Commissioner Ken Anderson over the resource adequacyquestion.

Anderson said he opposed a mandatory reserve margin and wasupset that Nelson pushed a decision at Friday's open meetingwith little notice.

Nelson said the commission needed to move forward on policyquestions even as they debate options and wait for additionalinformation from consultants.

Nelson likened the increased danger of having a blackout byrelying on a target reserve margin as similar to having a flattire while driving on bald tires.

"When my tires have low tread, I replace them with newtires," Nelson said. "It doesn't mean I won't ever get a flattire, but it does reduce the probability."

Anderson labeled a capacity market an "energy tax" onconsumers that "would not ensure reliability." He said moreinformation is needed to determine how much reserve supply theregion actually needs to avoid a lengthy blackout.

"We don't know if we have an issue," he said.

While Nelson and Marty insisted Friday's signal doesn't lockthe commission into a capacity market down the road, Andersoncalled it the start of a "very, very slippery slope with thepotential to destroy the economic engine that is Texas."

Nelson said she wants to strike the "right balance" betweenimproving reliability and higher power prices.

A Barclays analyst also viewed Friday's action as likely leading to a Texas capacity market. "This supports our view thatTexas is the only power market that supports investment," saidDaniel Ford in a note to clients.

However, Marty said she has not seen a capacity model "thatfits Texas. Whatever this commission develops, it will be uniqueto Texas," she said.

Power plant owners in the state include Luminant, a unit ofEnergy Future Holdings, which is owned by Kohlberg KravisRoberts & Co LLP and other private equity firms; NRGEnergy, Calpine, NextEra Energy Inc and Exelon Corp.

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