SHOCKED: Unprecedented energy prices jolt Rio Grande Valley business owners

McALLEN - Benny Rodriguez Jr. thought there must have been a mistake.

The general manager of Bob Stark's Beef Shop said his electric bill in late June had more than doubled from what it was the month before.

But even as the temperature rose outside, his business did not use significantly more electricity.

So Rodriguez called his energy provider, Strategic Energy, to try to sort out what he thought was an error, or at least get some answers.

"They really couldn't explain anything to me," he said.

The company said his variable rate had shot up astronomically for about 10 days in late May and early June.

Rodriguez wasn't the only one surprised by that month's energy bill.

Rick Cortez's Maverick Industrial Services in Weslaco launders linens, mats and uniforms for hospitals across the area - work that takes a lot of electricity to accomplish, he said.

Like the beef shop, Cortez was stunned to discover an extraordinary and unexpected spike in his electric bill.

"We went one day to the next from like 9 cents up to 25 cents," per kilowatt-hour, he said. "For me, that's over $10,000 in a difference in one month."

Both men - and their respective businesses - ended up having to pay for effects of instability never before seen in Texas' six-year-old deregulated retail electricity market.

Unprecedented volatility

The Rio Grande Valley pays more for electricity than most parts of the state, even on good days, said J.J. Garza, chief of staff for state Rep. Rene Oliveira, D-Brownsville, who sits on the House Regulated Industries Committee.

"South Texas doesn't generate a lot of its own electricity," Garza said. "It's coming from further up the state. That's a long way to move power, but it's got to be done."

But this time, the price volatility was so extreme that on May 20 the wholesale price of electricity in South Texas more than quadrupled from the day before.

The Electric Reliability Council of Texas, known as ERCOT, opened the electricity market to retail competition in 2002, meaning 6.1 million customers would have the "power to choose" their provider.

About 75 percent of Texas' electricity flow, including in the Valley, is covered by ERCOT. The Public Utility Commission of Texas oversees ERCOT, which itself is a private corporation.

Deregulation had meant that electricity customers enjoyed lower rates, said John Fainter, president and chief executive officer of the Association of Electric Companies of Texas, a trade organization that represents electric companies.

But those lower rates started to disappear when natural gas prices began to rise in January.

The prices for natural gas - the fuel that provides about 65 percent of Texas' generation capacity - have gone up this year. In fact, prices peaked at about $13.50 per thousand cubic feet at the end of June - up from about $7.50 at the beginning of the year.

But throughout July those prices plummeted, hitting about $9.25 last week - still nearly 20 percent higher than in January.

With that volatility in mind, higher fuel prices pushed up the long-term cost of electricity.

For Cortez and Rodriguez, whose companies had been in long-term fixed electricity contracts that expired this spring, they could not obtain new deals without having to pay 20 or 30 percent more.

Instead of renewing their fixed-rate plans, each businessman took on what are called "market clearing price for energy," or MCPE, plans, which was a gamble, but one that has historically paid off - the plans are typically more affordable than fixed-rate plans.

The MCPE plans were lower as long as energy demand, weather and the transmission grid remained relatively stable, as they had through most of 2007. Prices on those plans change rapidly - as often as every 15 minutes.

To compound the problem, so much electricity was trying to come across power lines that the congestion May 20 sent wholesale prices skyrocketing.

The stability that made the MCPE plan so attractive in the past was gone and retail customers - including The Monitor - were hit with unexpected spikes in their electric bills.

A ‘congestion' problem

The congestion first experienced May 20 sent the average market price for wholesale electricity up 465 percent from the day before - from a daily average of $182.20 per megawatt-hour to $848.48 per megawatt-hour, according to data from the Public Utility Commission of Texas.

That market uneasiness continued into early June - and some customers finally saw the effects on their electric bills later that month.

Two similar price spikes occurred May 23 and June 2.

"What had changed in 10 days ... hadn't changed in 40 years," Rodriguez said of his electric bill.

ERCOT uses a "balancing market" to address congestion and meet peak demands for electricity.

"We have to ensure that supply and demand are in balance," ERCOT spokeswoman Dottie Roark said.

When one of ERCOT's four zones does not generate enough electricity to meet its demand, the power needs to be moved in from the other three regions to balance the market, Roark said.

"We ended up in circumstances where we had to move everything and we kind of ran out (of ways to move the power)," said Dan Jones, who monitors the state's wholesale electricity market for ERCOT.

Much of the congestion that created the unprecedented wholesale price spikes was focused around Temple, which is about 60 miles north of Austin and is located on the north side of ERCOT's southern zone.

Because the Valley is in the same zone as Temple, electricity prices here went up as well - more than the hotter-than-anticipated Valley temperatures by themselves warranted.

And while congestion was the biggest factor in the jump, a failsafe against that jump broke down at the same time, said Jones, the market monitor who operates independently of ERCOT.

ERCOT uses a computer algorithm to cap the wholesale market price, he said. When that formula failed, wholesale market prices jumped as high as $4,200 per megawatt-hour during brief periods on the peak days.

"It was essentially like you had to pay the maximum toll twice," Jones said. "They kind of start to add together mathematically.
"That had actually not happened before."

‘It's important to do it right'

The last major peak on the wholesale market came June 2, when South Texas wholesale electricity prices averaged $713.34 per megawatt-hour.

Those wholesale price spikes caused five retail electricity providers across the state to close down, affecting about 40,000 out of 6.1 million electricity customers.

Those customers who bought electricity from the small providers that went under were transferred to what are called "providers of last resort," which charge more for electricity but ensure that customers' lights stay on.

To try to address the extreme volatility in the market, ERCOT placed price caps on the wholesale market and started to put some transmission lines under more localized control.

Since those new policies went into effect June 9, there have been no price spikes like those before.

But the new price caps only lessen the chance for future spikes, Jones said. The current zonal system for breaking up the state's electricity market remains flawed.

"The temperatures were high and the loads were high," he said. "We had some congestion that required more precise techniques" to manage the transmission lines. "But we didn't have that technique because of the zonal model."

ERCOT is preparing to implement a "nodal market" designed to keep congestion problems more localized, Jones said.

As conceived, the nodal market would contain spikes in congestion costs to a smaller area, rather than spread them out over large swaths of the state, said Roark, the ERCOT spokeswoman.

The state's Public Utility Commission was set to allow ERCOT to introduce the nodal market by the end of the year, Jones said.
But that has been delayed until sometime in 2009.

"It's not a surprise," Jones said. "For all the good things that it's going to do, it's important to do it right."

‘I can't just triple my prices'

As with gasoline prices, most of the increase in electricity prices over the past several months has come from higher costs of energy futures, not congestion on transmission lines and wholesale balancing markets, Jones said.

But as the wholesale electricity market seems to have settled for now, Rodriguez and Cortez said they feel uneasy about where energy prices could go from here.

Both men said their businesses are too competitive and profit margins too low to be able to simply pass their burden on to their customers.

Cortez said he has started checking natural gas prices several times per day - even using his cell phone. His variable-rate electric bill was lower in July, but he still made the move to another fixed-rate contract - at more than 30 percent what he had budgeted.

But having a predictable fixed rate should be worthwhile, even if it costs more than he was paying in the past, Cortez said.

"I couldn't really weather the storm too much longer with those higher variable rates," he said. "I really didn't want to take any more chances."

Rodriguez, meanwhile, said he negotiated with Strategic Energy to settle his steep bill in two payments. He has already changed to a fixed-rate contract with another provider.

"If I sell my rib eyes for $9 a pound, nobody is going to pay $27," Rodriguez said. "I just can't triple my prices.
"When you pay more in electricity than you do in rent, that's not right."

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Jared Taylor covers law enforcement and general assignments for The Monitor. You can reach him at (956) 683-4439.