Wholesale electric rates in Texas are already rising in response to a draft rule from the Public Utility Commission (PUC) of Texas which would increase the price cap in the wholesale market by 50% this summer, with such costs assuredly being passed on to retail electric customers.

Due to shrinking reserve margins -- or the amount of "extra" generation capacity available on record-setting hot days like Texas had last summer -- the PUC has moved forward with plans to raise the price cap in the wholesale electric market, which is currently $3,000 per megawatt-hour (MWh), or $3 per kilowatt-hour -- or about 4000% higher than current retail electric rates.

Regulators believe a higher price cap is necessary to incent new generation and assure new entrants of being able to recover the sunk costs of building a 20-30 year investment such as a power plant. The price cap is only hit during shortages of power (a handful of hours each year), such as during the hot, summer "super peaks," and regulators believe that the current $3,000 level, combined with the infrequent times it is hit, is inadequate to support the needed investment in new power plants.

Two of the three PUC commissioners support raising the price cap to $4,500 per MWh effective August 1, 2012. A draft proposal is currently out for public comment to finalize that change.

Although not yet final, the wholesale electric market has already reacted to the anticipated change, and forward energy prices have increased. Specifically, in the immediate aftermath of the PUC's proposed decision last week raising the price cap by 50% to $4,500, summer pricing in ERCOT jumped the equivalent of 1 cent per kilowatt-hour. While that may sound small, it represented an increase of 13% from where wholesale power prices had been.

Moreover, for the average Texas residential customer, an increase of 1 cent per kilowatt-hour can mean an extra $120 in electricity costs per year.

PUC commissioners also intend to raise the price cap further starting in 2013, and have issued a second proposal which includes a potential increase to $5,000 beginning June 1, 2013; $7,000 beginning June 1, 2014; and $9,000 beginning June 1, 2015.