Texas' Blackout Avoidance Measures Could Cost Billions, Group Says

Texas’ efforts to stave off future blackouts could cost ordinary households a couple hundred dollars per year, a filing by a Texas industrial group suggests.

The filing, submitted last week to the Public Utility Commission by a group called Texas Industrial Energy Consumers, says that a new pricing policy under consideration at the PUC would have cost Texas $4.7 billion had it been in place last year. That figure translates to nearly $17 per month, or about $200 per year for the average Texas household. However, the relationship between the new pricing policy and ordinary Texas households is indirect — and a different consulting group says that the price impact would be much lower.

The three public utility commissioners will vote June 28 on the policy, which involves raising a cap on wholesale electricity prices by 50 percent, to $4,500 a megawatt-hour. If approved, the policy would take effect in August. The idea is to direct more money to power-generation companies, who currently complain that electricity prices are so low — because of the abundance of natural gas — that they have no financial incentive to build new power plants to meet the needs of the growing state. Wholesale prices typically hover below $30 or $40 per megawatt-hour, but can shoot up to the cap when the grid is under strain, such as during hot summer afternoons.

Figuring out how much the new policy will cost ordinary Texans, and when those costs will begin to show up, is tricky. The industrial group's numbers are for wholesale electricity prices, and ordinary Texans do not pay these. Rather, companies called “retail electric providers” pay the wholesale prices in the deregulated parts of the Texas grid (which excludes places like Austin and San Antonio, which have their own utilities). And some of the retail groups have long-term contracts for wholesale power that may protect them from the price spikes.

But consumer advocates say that over the long term, the wholesale price increases typically get passed on to ordinary Texans.

The price impact of the proposed policies “seems to be counter to the whole notion of what we expected from deregulation — that it would drive prices lower, not higher,” said Geoffrey Gay, a lawyer with Lloyd Gosselink who represents a coalition of cities that wants affordable power.

Industrial companies — which consume huge amounts of electricity for manufacturing — also are concerned about potential price increases, which might not stop at $4,500 if Texas cannot persuade power companies to build more plants. Raising the wholesale price cap twice as high as is currently proposed — to $9,000 per megawatt-hour — would have resulted in $13.3 billion to $14 billion in wholesale electricity costs in 2011, according to the Texas industrial group.

“These are staggering numbers,” Phillip Oldham, a lawyer with Andrews Kurth in Austin, wrote in the filing on behalf of the Texas Industrial Energy Consumers. He noted, however, that the group also wanted to avoid blackouts, and “striking the right balance between reliability and appropriate pricing mechanisms is critical to the health of the Texas economy.”

The figures for a $9,000 price cap — an idea that Texas regulators have also been mulling, among other grid adjustments, and could vote on later this year — translate to $48 to $50 per month for an ordinary Texas household.

The per-household figures are not in the Texas energy group’s filing, but can be calculated by using the number of kilowatt-hours used on the Texas grid last year (335 billion), and assuming that an average Texas household uses 1,200 kilowatt-hours of power per month, a number used by the grid operator.

However, another estimate of the cost comes in considerably lower, for ordinary Texans. Sam Newell, a principal with the Brattle Group and author of a major report last month on the Texas grid, said on a UBS Investment Research conference call last week that even with a $9,000 cap, Texans would not see sky-high electric bills.

"While some of the press coverage seems to suggest that electricity bills might triple, that’s not even remotely the case," Newell said, according to a transcript. "At most, rates would increase by on average something like 4 percent for the generation component of the bill. So say half of that for the total bill, so we’re talking about a couple percent on customers’ bills to support a higher level of reliability."

In addition to the costs related to encouraging the construction of more power plants, Texas ratepayers should expect another big new expense too in the coming years: The costs for thousands of miles of transmission lines built to aid wind power have yet to hit Texas bills. The Public Utility Commission has yet to approve new charges related to the lines, but it is expected to start considering the “rate cases” that would lead to new charges soon. The commission has estimated that the costs will amount to $4 to $5 per household per month, for an indeterminate number of years.