State regulators and energy giant TXU this summer agreed to a plan that would have protected TXU from any more fines like the one for $171 million it now faces after being accused of manipulating the power market.

It would do so by implementing controls intended to protect consumers when demand for electricity spikes.

But in drafting the plan, the three public-utility commissioners ignored the recommendation of their own staff that a group of hundreds of Texas cities and an advocate for Texas ratepayers be allowed to participate. Reliant Energy, one of the state’s biggest electricity retailers, also asked — and was denied — a seat at the table.

And because of that, an Austin judge threw the deal out, saying it was against the law to keep outside parties from scrutinizing the deal.

High Prices, High Profits

Since regulations were eased on 85 percent of the Texas electricity market in 2002, prices have gone up more quickly and are higher than in the 15 percent of the market that’s still regulated. They’ve also gone up more quickly than the price of natural gas, the fuel used to generate about half the power in the state.

The deregulated market can be roughly divided into three sectors:

• The wholesale market in which the owners of power plants sell electricity to big buyers. Ninety to 95 percent of the power in that market is sold by contract. The other 5 to 10 percent is sold on the spot market: an auction held every 15 minutes to balance out the market’s needs.

• The retail market in which providers like Reliant buy power off the wholesale market and resell it to residences and small businesses.

• The system of power lines and utility poles over which electricity is distributed. That system, although privately owned in most places, is still fully regulated by the public utility commission.

It was hoped that with deregulation, providers would compete both at the wholesale and the retail levels, reducing prices for end-users.

But some experts say the wholesale market hasn’t been very competitive. It’s so expensive and difficult to build a power plant, that not many investors are eager to put up billions to get into the business.

And others say the repetitive nature of the wholesale auction allows players to figure out each others’ bidding strategies. A computer model created by a scientist at Carnegie Mellon University last year simulated the market and after 100 auctions, prices skyrocketed.

Manipulation Alleged

TXU is the largest electricity company in Texas. Private investors bought it this year for $45 billion, the largest leveraged buyout anywhere ever.

When they did, they gave some components of the company new names. The lines and poles it owns in the Dallas area are now under a company called Oncor. The retail operation still goes by TXU. The electricity-generation component now is called Luminant.

State regulators accuse the company of abusing its dominance in 2005 when it still went by TXU.

In a four-month period, the company withheld some power and offered some at prices that it knew were excessive, the utility commission contends. The result: $18.8 million in extra profits for TXU and $57 million in boosted prices for consumers, the utility commission says.

The commission proposes to fine TXU $171 million — or three times what it says the company cost wholesale buyers by manipulating the market.

TXU adamantly denies the charge and is fighting the fine.

A Fail-Safe?

This year, TXU and industry lobbyists waged a successful fight to kill a law that would have capped the amount of electricity generation it could control in any given zone.

And it agreed to a “market mitigation” plan with the utility commission. The plan was supposed to impose controls to keep wholesale prices from going up unreasonably. In exchange, the state would agree never to fine TXU so long as it followed the plan.

The commission, its staff and the independent market monitor — the same firm that originally accused TXU of manipulating the market in 2005 — all gave their blessing to the plan.

But a number of other players in the Texas electricity market weren’t willing to simply trust the commission and the independent monitor.

“We all said we have a stake in this process because it will affect prices throughout the market,” said Clarence Johnson of the Office of Public Utility Counsel, the state’s official advocate for consumers on utility issues.

Even the staff of the three-member utility commission recommended that Johnson’s agency, Reliant, and a consortium of 200 Texas cities — including Texas City — be allowed to participate in creating the TXU market-mitigation plan. But the commission ignored the recommendation.

In a filing arguing that outsiders shouldn’t be allowed into the process, TXU said the plan contained confidential business information. Allowing others to see it would put TXU at a competitive disadvantage, TXU argued.

Christopher Brewster is an Austin attorney representing the group of Texas cities. He said he knew enough about the mitigation plan to know it proposed a series of price caps and other limitations on how TXU operated in the market. But he said he didn’t know enough to say whether they were reasonable.

“We don’t know if the speed limit is 200 mph,” was how Brewster put it.

Geoffrey Gay, another lawyer for the cities, said he was worried that the plan would simply protect TXU from getting fined without protecting customers from manipulation.

Utility commission spokesman Terry Hadley was asked why the commissioners went against the advice of their staff and kept Brewster’s group and others from participating in mitigation plan. Hadley said the commissioners believed the participation of the staff and the independent market monitor was sufficient.

So Reliant, the cities and the office of utility counsel sued, arguing the law required they be allowed to review the plan and its effectiveness.

On Oct. 25, state District Court Judge Stephen Yelenosky agreed with them. He voided the mitigation agreement, writing that law required that others be allowed to participate.

The utility commission has decided not to appeal the ruling.

Meanwhile, TXU appears not to be interested in hashing out a new plan under any circumstances.

“It’s unlikely that we will re-file now because of the costly and uncertain nature of the regulatory proceeding that would now be required,” Lisa Singleton, TXU’s director of corporate communications, said in a statement.

In the same statement, Singleton declined to provide details about how her company planned to operate in the market in the future other than to say it would obey all the rules.