Last week, alerted Texas electric customers that a mechanism currently under review by the Public Utility Commission, called a "capacity market," had the potential to sharply increase Texas electric rates.

Now, a study from confirms that electric rates are higher in those states which rely on a capacity market to ensure there are enough power plants to meet demand.

Texas is considering a capacity market, which is an administrative mandate, among several proposals in response to narrow reserve margins and to incent investment in new power plants. Capacity markets are a mechanism used in certain states that mandate that customers pay capacity suppliers, such as power plants, for simply being available to meet demand in the future.

Essentially, under a capacity market, government regulators would mandate how much capacity to buy for future years in order assure reliability, and then would assign costs to each individual customer based on the customer's demand placed on the electric grid. Prices for capacity would be determined by an administrative construct designed to mimic a competitive auction, but whose prices would be heavily influenced by the design choices made by state government officials.'s price analysis compared all-in electric rates for Texas, as published by the U.S. Energy Information Administration (EIA), with rates in states with restructured electric markets that rely on a centralized capacity market. The results showed that residential, commercial, and industrial customers forced to buy capacity through a capacity market pay more for electricity than Texans.

For example, for June 2012, the all-in average Texas residential electric rate was 11.19 cents per kilowatt-hour (kWh). The rate was higher in every restructured state which features a centralized capacity market or capacity mandate, from rates in the 13¢/kWh range in Pennsylvania and Maryland to as high as 18¢/kWh in New York.

Texas' electric rates for commercial and industrial customers are similarly lower than rates in states which exclusively rely on a centralized capacity market for resource adequacy.

Recognizing that the EIA data reflects averages, a comparison of specific offers from competitive energy providers in Texas with those from suppliers in states with capacity markets confirms that Texas has lower electric rates.  For example, in the Oncor service area, a residential customer can find a 12-month fixed rate at a cost of 4.8¢/kWh for commodity energy, meaning the price of the product when excluding the charges for transmission and distribution (this adjustment is necessary because in other states, transmission and distribution charges are paid directly to the utility rather than the customer's chosen retail electric provider).  In contrast, at Duquesne Light in Pennsylvania, a utility which is within a capacity market, the lowest 12-month residential fixed energy offer is 6.39¢/kWh

One "back of the envelope" calculation cited by has pegged the potential cost to Texas customers from a capacity market at $3.6 billion per year. These billions of dollars in capacity costs would be in addition to the current rates paid by Texans for electricity, and why electric rates are higher in states with capacity markets, where customers must double-pay for both capacity and energy.

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