The Texas Public Utility Commission is scheduled to consider this Friday a proposed rule which would again double the wholesale electric price cap in the competitive electric market to $9,000 per megawatt-hour (MWh).

As has previously reported, the PUC this year already doubled the wholesale electric price cap from $3,000 per MWh to $4,500 per MWh.

Under the proposed rule likely to be voted on Friday, the PUC would again raise the wholesale price cap to the following levels under a three-year transition:

• $5,000 per MWh beginning June 1, 2013

• $7,000 per MWh beginning June 1, 2014

• $9,000 per MWh beginning June 1, 2015

As previously noted by, the higher electric market price caps are being considered as a means to ensure adequate generating capacity in ERCOT to meet increasing demand.

While the higher price caps will likely increase Texas electric rates, there will not be a 1-1 relationship (in other words, don't expect Texas retail electric rates to also double), because the new, higher wholesale price caps are not likely to be reached except in only a few hours each year, when grid conditions are especially tight and generating capacity is "scarce."

Moreover, under Texas' successful "energy-only" wholesale market design, retail electric providers, and therefore customers, typically are not exposed to the actual wholesale prices.  Because retail electric providers can hedge against the higher $9,000 wholesale price cap, they can shield their customers against paying drastically higher rates.

However, if the Texas PUC institutes a "capacity market" in addition to the $9,000 per MWh wholesale price cap, then Texas customers will likely see electric rates rise by billions of dollars annually.

Unlike in the energy market, Texas retail electric providers cannot hedge capacity costs, because they are a government mandate.  As has previously explained, the capacity market forces customers to buy a government-set level of capacity each year, through a separate charge on the bill, in addition to paying power plants for the energy they produce.

That means retail electric providers cannot customize their products and pricing to shield customers from the capacity charges, which will change each year.  Capacity will simply be another "pass-through" on the electric bill which is set by the government and is outside of the customer's control, much like distribution charges, the Advanced Metering System (AMS) surcharge, and the Energy Efficiency Cost Recovery Factor (EECRF).

These capacity charges are inconsistent with giving customers choice in their electric supplier, and are not needed to ensure new generation.  A report by ERCOT, which manages most of the state's electric grid, confirmed that had the $9,000/MWh wholesale price cap been in effect during 2011, and without a capacity market, a new peaking power plant would have recovered three times its annualized fixed costs.

The ability to recover three times a plant's annualized fixed costs in a single year shows that the energy-only market, with a higher price cap, is working, and that supplemental, out-of-market payments to capacity owners are not needed to cover fixed costs.  Therefore, Texas regulators shouldn't mandate a capacity charge, which is yet another charge on Texas electric bills which customers will have no choice but to pay.