The Public Utility Commission of Texas voted Thursday to require generators and transmission providers to weatherize their plants and systems ahead of the upcoming winter, and regulators say a more robust year-round standard is also in development.

"This rulemaking is a big step to making sure the resiliency of our grid is vastly improved this winter over last winter," Chairman Peter Lake said at the commission's open meeting.

Lake also presented a memo on potential changes to the state's wholesale energy markets, in an effort to ensure generation is available when needed. The PUC has been taking comments from stakeholders on market reforms, as the state's energy-only market has come under fire in the wake of February's winter freeze and blackouts.

Unlike other grid operators, the Electric Reliabiltiy Council of Texas (ERCOT) operates only an energy market to meet customer demand and does not use a capacity market to ensure necessary resources will be available. Instead, the state depends on the promise of higher prices to incentivize generation.

Without endorsing particular proposals, regulators ultimately agreed to explore changes to the market's Operating Reserve Demand Curve, which helps to set scarcity prices, and to consider a reliability obligation for load serving entities (LSE). Setting a reliability obligation would be a "monumental" change to the market, Lake said.

Observers say the LSE obligation could look a lot like a quasi-capacity market system used in California, and would represent a significant departure from the state's current market construct.

Weatherization a 'no brainer'

The PUC's meeting Thursday was split into two parts. Regulators quickly approved weatherization requirements, before moving on to more potentially contentious market discussions.

Mike Hogan, a senior advisor at the Regulatory Assistance Project, called the PUC's weatherization rule "kind of a no brainer," as it directly addresses the causes of the winter blackouts. "February was not a resource adequacy event," he said.

The February blackouts were caused by cold temperatures forcing generation offline. More than 1,000 units were affected by the cold snap, and 57% of them were gas-fired plants often struggling to procure fuel, according to a joint report by the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation (NERC). Wind, coal, solar and nuclear generators were also impacted.

Regulators on Thursday required utilities to "fix any known, acute issues that arose from winter weather conditions," and for company officials to file notarized statements that the work has been completed. 

The rule adopts recommendations identified in a 2012 report on extreme weather, conducted by Quanta Technology following a winter event the previous year. It would also require transmission service providers to implement recommendations from a 2011 report on outages in the Southwest, prepared by FERC and NERC.

The weatherization decision is a "good rule," said Allison Silverstein, an independent consultant working with the American Council for an Energy-Efficient Economy (ACEEE). "It doesn't leave a lot of wiggle room, and it is very specific as to what generation and transmission owners have to do to prepare for winter ...  and it has pretty good inspection and enforcement provisions."

'A capacity market in drag' 

The commissioners quickly moved on to a market discussion centered on Lake's memo, which he framed as a "starting point" and stressed "these design concepts are preliminary." Ultimately, the PUC used the memo as a base to direct staff and outside consultant Brattle Group to explore a range of scenarios and market adjustments.

The biggest change considered in Lake's memo is the potential adoption of an LSE reliability obligation. Stakeholders may be asked to respond to proposals by Nov. 1, Lake said at the meeting, but more details will come within a week.

Observers say it would be a significant departure from Texas' current energy-only market construct, as the LSE obligation looks similar to a capacity market.

"The LSE obligation looks pretty much like a capacity market in drag," Silverstein said. "And as was evident from the commissioners' conversation, nobody knows whether it will actually improve reliability." Also unknown, she added: whether the approach would improve resource availability, incentivize new generation, or what it would cost.

The obligation envisioned in Lake's memo includes a three-year forward obligation to acquire resources.

"That is, in a nutshell, the same as a capacity market," said Suzanne Bertin, managing director of the Texas Advanced Energy Business Alliance (TAEBA). Without taking a position on the idea, she added it was very likely to spur debate. "The details of capacity markets are constantly being debated. It's a never ending controversy," she said.

The LSE obligation "looks a lot like the over-managed [California] quasi-capacity market system," Silverstein added in an email. The California Independent System Operator does not operate a formal capacity market but does have a mandatory resource adequacy requirement for LSEs.

"There are a massive number of unknowns," Silverstein said, including questions of whether an LSE load serving obligation "could stifle or cause harm in the retail market."

Commissioners wary of capacity market constructs

PUC commissioners themselves were wary of new market constructs. Lake kicked off the discussion by saying he would not support development of a capacity market in the form of a new ancillary service.

"Even if a capacity market disguised as an ancillary service might solve the short-term reliability problems, in the long-run, if we continue to have increased intermittent resources, it's just a band-aid. It will not solve the problem," Lake said.

"I am definitely not ready to endorse a LSE obligation today," Commissioner Will McAdams said. "I have significant questions about what this would do to our market. ... Who administers the program? Does the PUC become the IRS?"

Commissioner Lori Cobos noted that some form of a capacity market element was prevalent in recommendations the PUC received, but said "our focus should be on operational reliability issues we have and will continue to experience."

Some version of a reliability standard to ensure sufficient dispatchable resources are available was proposed by generators and other parties, including Exelon Generation and NRG Energy.

Advocates urge demand side focus  

Lake's memo didn't include energy efficiency as a resource (though it did include demand response), disappointing conservation advocates.

RAP's Hogan said the commission should be giving more weight to demand response and energy efficiency in order to achieve the best outcome for consumers. He said these measures would provide more benefit at lower cost than some of the suggested measures.

If regulators are committed to making market changes, RAP has floated the idea of a system similar to Australia's Retailer Reliability Obligation to act as a reliability backstop. But proposals to centralize net load forecasting and other key responsibilities in ERCOT "gut the key feature" of the Australian system, said Hogan.

"One of the things about the Australian mechanism is that it is fully decentralized," Hogan said. Some of the proposals put forward in the PUC docket appear to take primary discretion over some critical decisions away from LSEs and centralize them at ERCOT, he said.

That's the problem Eastern U.S. capacity markets are now trying to solve, said Hogan. It places those responsibilities entirely "in the hands of people who, even with the best of intentions have deeply, deeply ingrained biases towards traditional bulk system generation, towards over forecasting peak load, and towards minimizing the extent to which they rely on energy efficiency and demand response."

New analysis from ACEEE concluded residential energy efficiency and demand response programs could help Texas maintain reliability in extreme events. Deployed over five years, the group identified seven programs that could lower summer peaks by 7,650 MW and winter peaks by 11,400 MW, helping to eliminate the need for new generation.

"This continued lack of focus on energy efficiency is disappointing," TAEBA's Bertin said. "It is truly foundational to anything that we do in this market. ... We think that's a major failing if the commission does not move forward with definitely deepening the commitment to energy efficiency."