The decision by the Public Utility Commission of Texas to increase the electric price cap in the wholesale market to $4,500 per megawatt-hour (MWh) effective August 1, 2012 could cause Texas retail electric providers to go out of business, the Houston Chronicle confirms. That means customers must be sure they are being served by a financially sound and proven retail electric provider to avoid the pitfalls associated with the default of a retail provider.

Any time wholesale power prices spike, it puts pressure on "marginal" retail electric providers, who may not have the capital or resources to deal with unexpected high prices in the wholesale market. The Chronicle compares the current increase in the wholesale price cap to 2008, when five retail electric providers officially went out of business (and more sold off their customers to competitors to avoid default) due to prolonged price spikes and congestion in the wholesale market.

But the 50% increase in the wholesale price cap which takes effect August 1 is just part of the story. Aside from the large increase, it's the timing of the increase which has really strained retail providers.

The increase to $4,500 was proposed less than 6 months ago, and only became official in June. Retail electric providers have privately said that this accelerated timeline has given them insufficient time to hedge against the increase, put new financing in order, and find additional capital to pay for the anticipated higher prices and higher collateral requirements which accompany higher wholesale energy prices.

That means retail providers will have to rely on their existing balance sheets and resources to make it through the summer. While this will not be a problem for most of the retail providers, who have robust balance sheets and adequate credit, other electric companies in the market are simply under-capitalized, and will be severely tested if electric prices reach $4,500.

Already, one niche retail electric provider has sold its customers to a competitor. Though no official reason for the market exit was given, the prospect of the higher price cap, and an inability to raise capital, was a likely cause.

If your retail electric provider defaults, you are automatically placed on the "Provider of Last Resort" -- a backstop provider designed to ensure that customers do not lose power. However, because the Provider of Last Resort must serve customers without notice, it is allowed to charge the market rate for power, which can be two to three times higher than typical electric rates in the market.

That's why customers need to assure themselves that their retail electric provider won't default, and will be able to stand behind their low energy rate.