Electric resellers profit on mistakes

By R.A. DYER Star-Telegram Austin Bureau - Dec 17th

AUSTIN - Flaws in the state's developing electric deregulation market apparently led to millions of dollars in unearned revenue for several Texas energy companies, according to a review by regulators.

The unearned revenue came not through making savvy deals, such as cheaply purchasing wholesale power. Rather, a quirk in the new market system rewarded companies for incorrectly projecting their own energy needs, according to the review.

Regulators say it remains unclear whether these companies had some legitimate reason for the missed forecasts, or whether they deliberately took advantage of the system to unfairly profit from it. Left unchecked, however, the behavior could eventually drive up residential electric bills, analysts say.

"If someone is gaming the system, there is a transfer of money going on without any economic justification for it - and the commission is concerned about that," said Parviz Adib, director of the market oversight division of the Texas Public Utility Commission.

Citing confidentiality agreements, Adib would not identify the companies. He said the companies are not traditional power utilities such as TXU or Houston's Reliant, but rather "qualified scheduling entities" that act as middlemen between electric utilities or retailers and the Texas power grid.

Of 46 QSEs operating in Texas, six received at least $1 million in credits as a direct result of missed projections, according to Adib's review. The PUC economist analyzed their forecasting behavior during a 15-day period last August, shortly after Texas switched over to a new electricity trading system under the deregulation law.

In some cases, the magnitude of error was stunning. One company consistently missed by 5 percent to 45 percent, another by 150 percent to 300 percent, and a third by 75,000 percent to 400,000 percent, according to the analysis.

"That's very, very high - and you can't justify it," said Adib, although he emphasized that he is not accusing any company of deliberately misusing the system. He said new market rules under development by operators of the Texas power grid can reduce - but not eliminate - the problem.

Clarence Johnson, an analyst with a state agency that represents consumer interests before the PUC, said the dramatic errors should raise red flags. Left unchecked, he said, such behavior can increase the cost of electricity for all Texans and even undermine the stability of the power grid.

"And even if the period of time we've looked at is fairly brief, it could be a symptom ... that develops into a more severe problem in the future - and with more significant cost impacts in the future," said Johnson, an analyst with the Office of Public Utility Counsel.

The gaming opportunities arise from rules governing the behavior of QSEs, which act on behalf of power companies by scheduling their electricity transmission through the power grid.

Under market rules, QSEs must project in advance how much electricity their clients expect to acquire or generate in any given day, as well as how much electricity their clients' customers expect to consume. The Texas power grid uses these projections to prevent blackouts, as even a brief imbalance between consumption and generation destabilizes the grid.

The power grid pays money to QSEs that consume less energy than they project and assess charges against QSEs that produce less energy than they project. Typically, these credits and charges cancel one another so a given QSE would receive neither a significant benefit nor a significant loss by deviating from their projections.

But under certain circumstances - for instance, during periods when power must pass over potentially overburdened transmission lines - missed projections can generate net revenues for a QSE.

Experienced energy schedulers working on behalf of these entities likely can predict these special circumstances. The concern is that schedulers intentionally project more energy than needed during crucial periods and thereby generate extra revenues.

"The concern is both one of reliability - having the power available when you need it - and the potential for volatile price spikes," said Johnson, of the Office of Public Utility Counsel. "Ultimately, in the long run, it would also increase the cost of power for everyone. It may take an indirect route to the consumer, but ultimately, it gets to the consumer."

The problem also appears related to disputed charges borne by the state's municipally owned utilities. Those charges peaked last summer - during days of high electricity use, when transmission lines became overburdened - and could peak again next summer.

Some representatives of municipally owned utilities have complained bitterly about the charges, saying they did not exist prior to switching to the new deregulated market. These independent utilities have not opted into Texas deregulation but complain that they must still bear some of its costs.

The issue also has drawn the attention of state lawmakers. State Rep. Steve Wolens, the Dallas Democrat who co-authored the electric deregulation law, said lawmakers will review the issue during hearings next year.

He expressed hope, however, that new rules under development by the Texas power grid will help alleviate the problem. Under the new rules, QSEs that schedule power in such a way as to overburden transmission lines would make additional payments to the grid.

Those rules should be complete by February.

However, Adib said the new rules will do nothing to correct other contributing factors, such as a general shortage of transmission lines in Texas. "And there is no way to design a perfect system - there is no way to design a system that is completely game proof," he said.

R.A. Dyer, (512) 476-4294 rdyer@star-telegram.com