TXU warns Texas PUC policies may lead to some plants shutting

Boston (Platts)--5Apr2007

A senior TXU executive has told the Texas Public Utility Commission that
the company may be forced to shut several of its older natural gas-fired
plants if the agency does not give it "an opportunity to cover the real and
legitimate costs associated with owning, operating and maintaining" them.

TXU Wholesale Chairman and CEO Mike McCall said in a letter that TXU is
concerned it risks "potential penalties" if its offers balancing energy from
the units at prices above short-run marginal costs. The PUC staff has
recommended the agency fine TXU $210 million for alleged market manipulation
in 2005. The letter was posted on the company's web site Thursday.

McCall said that the PUC "expressly adopted an 'energy only' market [for
balancing energy] and rejected the 'capacity and energy' market design used in
some other markets." Under the latter market, McCall said, generation owners
receive a portion of their revenues from capacity payments intended to offset
some or all of their fixed costs. In adopting an energy-only market, he said,
the PUC "recognized that prices would be more volatile at times and recognized
that generation companies would have to offer generation for sale through the
[balancing-energy] segment of the [Electric Reliability Council of Texas]
wholesale market in a manner that would allow them to cover their costs."

The staff's penalty recommendation conflicts with the energy-only
approach, McCall said, because it strongly discourages generators from
submitting relatively high bids to produce energy out of fear that such bids
could lead to future penalties. Unless corrected, he said, "this conflict ...
has the potential to create a great disruption in the wholesale market.

McCall said power plants idled earlier will have to be brought back into
service over the next several years to meet expected increases in demand while
new, more efficient plants are being built. "Any owner of generation that has
capacity currently mothballed will likely be very reluctant to staff, expend
capital, and make necessary repairs to make the capacity available to the
market if they are not allowed to offer the generation to the [balancing
energy] segment of the market for any more than short-run marginal costs,
which are essentially only the cost of natural gas," he added.

He said his company has two options -- bid energy into the balancing
energy market as it always has and face possible penalties, or obtain
"immediate" PUC approval of a plan that would provide the "regulatory
certainty necessary to allow it to continue to provide" balancing energy at a
regulated price. "Of these, the second option is clearly preferable for Texas
and it's effectively the only option for the TXU" given the staff's
recommendation, he said.