Texas electric customers are likely to see higher electric rates in the next year or so due to a decision from the state's Public Utility Commission (PUC) to require a "mandated reserve margin."

The reserve margin is the amount of "extra" power capacity available to the electric grid that isn't being used.  Such a cushion is needed because actual demand can outpace demand forecasts during extreme weather, and because power plants sometimes trip offline due to problems, meaning other power plants need to come online.

While a reserve margin is needed, ever since Texas introduced competition and choice into its electricity market over a decade ago, it has not required a mandated level of reserve margin.  The idea was that with competition, customers should no longer be obligated to pay specific power plants to be available to meet the reserve margin, and, in exchange, the government would allow market forces, not the PUC, to set electric rates.

Notably, in the 10+ years that Texas has operated without a mandated reserve margin, Texas has never had a problem with the electric grid that would have been solved by meeting a mandated reserve margin.  In the meantime, because Texans can unlock the power to competition, Texans are paying electric rates that are below the rates from 10 years ago (how many other products can you say that about?) This successful electric market has incubated the Texas miracle, and allowed manufacturing and other industries to thrive in Texas, in contrast to states in the Northeast that rely on "capacity markets" to achieve a mandated reserve margin, which have seen the price of electricity skyrocket.

However, despite the 10+ years of a successful electric market, certain self-serving stakeholders have been making dire (and unlikely) predictions about future electricity shortages unless Texas introduces a mandated reserve margin and "capacity market."  Two of the three PUC Commissioners have voiced support for mandating a reserve margin in Texas, reversing 10 years of customer choice.

Under the mandated reserve margin, if Texas does not meet this government-determined reserve margin, customers would be forced to pay extra money to power plants, under a government-designed compensation scheme.  The most likely scheme, called a capacity market, has been forecast to cost Texans nearly $5 billion annually, threatening the Texas miracle of job creation and economic growth that has been fueled by low electricity rates.

PUC Commissioner Kenneth Anderson has been the lone voice at the PUC opposed to such a bad policy for Texas, calling a mandated reserve margin and capacity market an "energy tax" that won't actually improve reliability or help keep the lights on.

The mandated reserve margin is, "the first step on a slippery, very slippery slope that has the potential to destroy the economic engine that is Texas," Anderson said.

The Texas Association of Manufacturers, in an op-ed in the Houston Chronicle, said that, "shifting to a capacity market would threaten competition, choice and access to affordable, reliable energy for all Texans."

"If regulators flip us back to a mandated, government-run system, everyone will pay more by way of this electricity tax on top of direct energy costs. Electric customers will pay billions per year while power generators - even the most unreliable and inefficient - would receive large sums of money for just 'being there.' In a capacity market, the money doesn't even go toward new power plants for Texans. A recent study showed that well more than 90 percent of the money in a capacity market went to existing power plants, effectively buying consumers nothing," the Texas Association of Manufacturers said.


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