Texas public policy foundation
But for the Grace of the PUC, Texas Goes

The debate over the future of Texas' electricity market continues, this time in the Austin-Statesman. This past week, the Statesman saw two op-eds hashing out whether the Public Utility Commission of Texas (PUC) should adopt a planning reserve margin, otherwise known as a capacity market. The first, written by the Foundation, reminded the PUC that it should worry more about making the right decision than a fast one and argued that the competitive electricity market is not broken.

The second article took a different approach. Written by Joseph T. Kelliher, a former chairman of the Federal Energy Regulatory Commission, this editorial supported more government intervention and advised Texans, the PUC especially, to take their cues from other regional grids.

Challenge accepted!

Kelliher certainly isn't the first to suggest that northeastern capacity markets could teach Texas a few things about resource adequacy. So let's take that leap down the rabbit hole and see exactly what lessons Texas can learn from its northeastern cousins. Here's a hint: capacity markets won't solve Texas' alleged resource adequacy riddle and it certainly won't do so more efficiently than the energy-only market.

Lesson #1: Capacity Markets Are Expensive

The very purpose of a capacity market is to increase energy costs by tacking on an additional "product" (aka capacity) to a consumers' energy bill and redistributing it to generating companies. In that, northeastern capacity markets succeed.

Capacity markets cost consumers billions of dollars each year. PJM, the regional transmission organization that serves all or parts of thirteen states in the mid-Atlantic, installed a forward capacity market in 2007. Since that time, capacity payments have totaled approximately $54 billion. Split evenly, that's around $900 per person.

A Texas capacity market looks like it will fall in the same range. Early estimates have gaged a capacity market costing Texas consumers between $3 and $5 billion per year or, put another way, $180 per year for every man, women, and child in Texas. Let's not forget that these numbers do not include design and implementation expenses, such as the eventual litigation costs. Capacity markets may be many things, but they're definitely not cheap.

Lesson #2: Texas Electricity Bill Will Go Up

The increased costs land directly in a consumer's monthly electricity bill. Capacity payments represented 18 percent of a PJM customer's wholesale bill. Additionally, the amount consumers paid in capacity payments spiked in congested areas. In New Jersey, capacity payments added $140 per year to the average homeowner's electric bill. They also added another $1,000 to a retail store's annual energy costs and $15,000 for an industrial facility. They became just one more barbell weighing down New Jersey entrepreneurs hoping to start a business and share a decent quality of life-another reason why so many northeastern residents moved to Texas for greater economic opportunities.

Lesson #3: Generation Companies Will Make a Lot of Money

Not everyone has suffered under the northeastern capacity markets. Generation companies, for instance, have made a whole lot of money. For example, of the $54 billion that PJM took from consumers, 94 percent went to existing generators. Only 1.8 percent meandered its way to new or reactivated generation sources.  That means over $50 billion went into subsidizing the operational costs of energy services that consumers already had paid for. Consumers paid twice, and generation companies got "free" money. It's no wonder than that generation owners are fighting the entry of new power plants in New York City, New Jersey, and Maryland. They're afraid that the young whippersnappers will intercept their corporate welfare check.

Lesson #4 Capacity Markets Will Not Boost Capacity

While northeastern capacity markets are very successful at raising energy costs, they're not as successful at boosting a region's energy capacity. Once again, PJM is a prime example. From the inception of PJM's capacity market in 2007 through its 2011 auction, capacity payments funded only about 7,000 MW of new generation, about 4 percent of PJM's total installed generating capacity. This is despite customers paying $50 billion in capacity payments. Put in context, the same amount of funds could have purchased up to 51,600 MW of capacity had that money been spent directly on new generation.

Worse, the capacity added to the region was concentrated in unpopulated areas outside of PJM's congested energy zones, pinching them from much needed supplies. Conditions have gotten so bad that New Jersey and Maryland had to solicit their own contracts with energy generators to avoid the risk of shortages. PJM's capacity market failed its one stated purpose, to provide states a sufficient supply of energy capacity. Then again, what else can you expect when a policy funnels 93 percent of its funds to existing corporate interests.

Lesson #5 Blackouts Will Not Go Away

But a capacity market will prevent blackouts, right? Well, not exactly. PJM just suffered rolling blackouts this past September when several plants went offline for seasonal maintenance. And this wasn't a fluke. As explained above, capacity markets do not have the greatest track record at boosting capacity, so they won't make the grid more reliable that way. In addition, capacity markets do not even address issues like transmission line failures or plants going offline. Thus, even if the capacity market managed to generate enough energy, there's no guarantee that it could transport it to Texas homes. That's the long way of saying blackouts can and will still happen under a capacity market.

So let's recap. Capacity markets will cost Texas billions of dollars. They'll increase everyone's monthly electricity bill, sometimes by hundreds of dollars. Energy generators will make a lot of money, but Texas won't see an increase in capacity, and blackouts can still happen.

Kelliher was right. Looking at other regions does provide a compelling case in the Texas electricity debate.

The experiences of other regions show that capacity markets represent nothing more than an expensive corporate welfare scheme that raises electricity bills and forces consumers to subsidize services that they already have paid for. They offer Texas nothing that it couldn't get from an energy-only market at a cheaper, more efficient price.

As the PUC considers moving to a mandatory planning reserve margin, they should look to other regions, PJM in particular. Capacity markets have not solved resource adequacy in the North East, but they have made living and doing business in those regions more expensive. If Texas truly wishes to remain committed to free markets and economic opportunity, then the PUC needs to reject a planning reserve margin. Northeastern capacity markets are one set of footprints that PUC should not want Texas to follow.