The Public Utility Commission of Texas (Commission or PUCT) held an open meeting yesterday to provide direction on two important issues: Phase II of the Commission’s market redesign effort and the ERCOT Board of Directors’ proposed amendments to the ERCOT Bylaws. This alert summarizes the Commission’s actions on both issues and provides links to key documents. In the coming days, we will also be providing a more detailed summary of the Commission’s discussion and the market redesign study (E3 Report) prepared by Energy and Environmental Economics, Inc. (E3).
ERCOT Market Redesign
In June 2022, in the wake of Winter Storm Uri and pursuant to Senate Bill (SB) 3, the Commission engaged E3 to study a number of options to reform the ERCOT market to align with the Commission’s blueprint for reliability. On Thursday, November 10, 2022, Commission Staff filed in Docket No. 52373, the E3 Report addressing potential options to redesign to the ERCOT market as part of Phase II of the Commission’s review of the ERCOT market.
In its report filed publicly on November 10th, E3 posits that if no action is taken, an additional 11,560 MW of firm capacity will retire by 2026 and reliability will significantly decrease. The E3 Report claims that the establishment of one of the following market mechanisms would ensure sufficient reliability.
Market Redesign Options:
- Load Serving Entity (LSE) Reliability Obligation (LSERO)
- Forward Reliability Market (FRM)
- Performance Credit Mechanism (PCM)
- Backstop Reliability Service (BRS)
- Dispatchable Energy Credits (DEC)
- BRS + DEC Hybrid
Of these options, E3 recommends the adoption of a FRM because it is a market-based solution with a proven track record. However, PUCT Staff, working closely with Chairman Lake, recommended the adoption of PCM over the other options listed above, including the FRM. Staff's memo, which accompanies the E3 Report, notes the principles for a Load-Side Reliability Mechanism and how the PCM meets the certain principles.
Staff has opened Project No. 54355, Review of Market Reform Assessment Produced by E3, to further consider proposed market reforms. Interested parties may file comments to the specific questions posed by the Commission (listed below) no later than noon on December 15, 2022. Comments are limited to 25 pages and must include an executive summary as the last page of the filing. Notably, the questions focus on the adoption and implementation of a PCM and do not ask for input on the E3 Report generally or on the merits of other approaches discussed in the E3 Report.
During the open meeting, there was discussion among the Commissioners about the E3 Report. Chairman Lake, Commissioner McAdams, and Commissioner Jackson voiced support for the adoption of a PCM. Commissioner Cobos voiced support for a BRS option and proposed additional questions to seek public comment on the assumptions, methodology, and conclusions of the E3 Report. Commissioner Glotfelty voiced support for the adoption of a BRS + DEC hybrid solution and requested that the public be asked to comment on the appropriate solution. The Chairman agreed to add questions suggested by Commissioner Cobos and Glotfelty. Questions 1-9 were proposed by Staff. Questions 10 and 11 were added at the request of Commissioner Cobos. Question 12 was added at the request of Commissioner Glotfelty.
1. The E3’s report observes that the PCM has no prior precedent for implementation, does this fact present a significant obstacle to its operation for the ERCOT market?
2. Would the PCM design incentivize generation performance, retention, and market entry consistent with the Legislature’s and the commission’s goal to meet demand during times of net peak load and extreme power consumption conditions?Why or why not?
3. What is the appropriate reliability standard to achieve the goals stated in Question 2?Is 1-in-10 loss of load expectation (LOLE) a reasonable standard to set, or should another standard be used, such as expected unserved energy (EUE).If recommending a different standard, at what level should the standard be set (e.g., how many MWh of EUE per year)?
4. The E3 report examines 30 hours of highest reliability risk over a year. Is 30 the appropriate number of hours for this purpose?Should the reliability risk focus on a different measure?
5. Over what period should the hours of highest reliability risk be determined?A year, a season, a month, or some other interval? At what point in time should that determination be made?
6. Would a voluntary forward market for generation offers and a mandatory residual settlement process for LSE procurement provide additional generation revenue sufficient to incentivize resource availability in a way that improves reliability?
7. Does a centrally cleared market through ERCOT sufficiently mitigate the risk of market power abuse?Should additional tools be considered?
8. If the commission adopts a market design with a multi-year implementation timeline, is there a need for a short-term “bridge” product or service, like the Backstop Reliability Service (BRS), to maintain system reliability equivalent to a 1-in-10 LOLE or another reliability standard?If so, what product or service should be considered?
9. If implementing a short-term design as a “bridge” delays the ultimate solution, should it be considered?Is there an alternative to a bridge solution that could be implemented immediately, using existing products, such as a long-term commitment to buy the additional 5,630 MW of Ancillary services necessary to achieve the 1-in-10 LOLE reliability standard?
10. What is the impact of the PCM on consumer costs?
11. What is the fastest and most efficient manner to build a “bridge” product or service, such as the BRS, in order to start sending market signals for investment in new and dispatchable generation, while a multi-year market design is implemented by ERCOT? Please provide specific steps.
12. In what ways could the Dispatchable Energy Credit (DEC) design be modified through quantity and resource eligibility requirements, e.g. new technology such as small modular nuclear reactors, in such a way that it incentivizes new and dispatchable generation?
See https://www.puc.texas.gov/industry/electric/reliability.aspx for additional information on the Commission’s redesign efforts.
ERCOT Board’s Proposed Amendments to the ERCOT Bylaws
In August 2022, the ERCOT Board began publicly discussing amendments to the current ERCOT Bylaws to eliminate the voting rights of ERCOT Corporate Members, except for the right to elect representatives of ERCOT’s Technical Advisory Committee (TAC). On September 9, 2022, ERCOT published the proposed amendments and issued a Market Notice requesting comments from Corporate Members. The amendments proposed to remove Corporate Members’ voting rights as to ERCOT’s governing documents—i.e., the ERCOT Certificate of Formation (COF) and the ERCOT Bylaws. Numerous ERCOT stakeholders from all market segments filed comments expressing policy and legal concerns with ERCOT’s proposed amendments.
On November 8, 2022, ERCOT filed a letter in Project No. 52933 seeking guidance from the Commission concerning proposed amendments to the ERCOT Bylaws. ERCOT further modified the previously proposed amendments to reflect that the Bylaws cannot be amended to eliminate TAC without direction from the Commission, and to clarify the process for amendments to the Bylaws. The revised proposed amendments still eliminate Corporate Members’ rights to vote on amendments to ERCOT’s governing documents.
On November 9, 2022, Commissioner Lake filed a memorandumsupporting ERCOT’s proposed changes, describing the change as being consistent with the Texas Legislature’s intent when it passed SB 2. During yesterday’s open meeting, the Commissioners voiced their approval for the proposed amendments, and the discussion was generally consistent with the Chairman’s memorandum. We expect that at the December 20, 2022 Board meeting, the ERCOT Board will vote to amend the Bylaws consistent with the proposal filed by ERCOT.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.