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On February 16th, the Texas Public Utility Commission issued a now-infamous order that wholesale electricity prices in the state should be set at $9,000 per megawatt-hour. The claim was that the high price was needed to incentivize electricity production during the week that Winter Storm Uri was hammering the state and millions of Texans were blacked out due to a shortage of juice. The order declared that such a high price was needed because “energy prices should reflect scarcity of supply.”
That’s exactly what happened: energy prices skyrocketed. Now, as the dust is settling and the Texas Legislature has adjourned after passing several bills that aimed to fix the state’s fragile electric grid, three truths have become clear: the state’s policymakers have not done enough to ensure the resilience and reliability of the grid, the February 16 PUC order kept electricity prices far too high for far too long, and Texas ratepayers will ultimately be saddled with about $37.7 billion in excess energy costs.
Before going further, I should also note that the death toll from the storm keeps climbing. In the weeks after the storm, official reports put the number of Texans killed at about 100. An April investigation by reporters at the Houston Chronicle found that the deadly storm likely killed at least 200 Texans. On May 26, an analysis published by BuzzFeed News said the actual death toll, when including the medically vulnerable who perished due to storm-related disruptions, could be as high as 700.
Top leaders in the state are trying to minimize the political fallout from the disaster. On Tuesday, Texas Gov. Greg Abbott claimed “Everything that needed to be done was done to fix the power grid in Texas.” That is not true.
Abbott made a show of signing a pair of bills aimed at addressing the state’s electricity crisis. The measures require infrastructure weatherization, an emergency alert system, better coordination among the state’s regulators, and changes in how the PUC and the Electric Reliability Council of Texas will be managed. But the state did not go far enough to avert another disaster. The Texas grid is still vulnerable and the disaster that occurred in February could be repeated next winter. Heck, the state could face blackouts this summer because the structure of the state’s energy-only electricity market is still not incentivizing enough reliable capacity to be built and maintained. Further, the state did not go far enough in requiring natural gas producers to weatherize their infrastructure. And as Jolly Hayden of Austin-based consulting firm GDS Associates, pointed out in March, the state hasn’t done enough to “develop a more granular load reduction plan” that would allow utilities and ERCOT to reduce electricity demand more selectively, a move that would allow critical buildings (fire stations and hospitals) to have power while cutting power to less important customers.
Now let me explain why the February 16 order was so disastrous, and why it likely cost the state’s ratepayers some $26 billion more than they should have been charged for the electricity they used.
On June 1, just after the Texas Legislature adjourned, a study done by London Economics International was released. The study, which was paid for by Vistra Corp., one of the state’s biggest electricity generators, found that ERCOT kept its $9,000 per megawatt-hour price in place for too long during the week of the storm. It concluded that the wholesale price was $6,578 per megawatt-hour too high and it stayed too high for about 80 hours. Furthermore, keeping the price at $9,000 did not bring any more electricity supply onto the grid, a point that former ERCOT CEO Bill Magness made during a February 24 “urgent board of directors meeting.”
Although the LEI report does not provide a total cost estimate, calculating the excess cost to ratepayers for the overpriced electricity is straightforward. Over that 80-hour time period, electricity demand in Texas was about 50,000 megawatts. Thus, a bit of simple multiplication — $6,578 x 80 hours x 50,000 MW — shows that Texas consumers were overcharged by roughly $26.3 billion due to the inattention or incompetence of officials at the PUC and ERCOT.
That $26.3 billion figure is far higher than an earlier estimate of the overcharges. In March, Potomac Economics, the independent market monitor for the PUC, recommended that the state retroactively reduce the wholesale power price for part of the week of the freeze. It put the amount of the overcharge at about $16 billion.
Regardless of whether the correct figure is $16 billion or $26.3 billion, why didn’t this multi-billion-dollar blunder get more attention from the Texas Legislature? One of the most plausible explanations is that Abbott didn’t want that attention. The chair of the PUC during the crisis — and the one who signed the February 16 order mentioned above — was DeAnn Walker. Walker was appointed to the PUC by Abbott. Her job before the PUC was as one of Abbott’s senior policy advisors. Thus, any further scrutiny of Walker’s actions during the week of the freeze makes Abbott look bad.
The overcharges bring us to the $37.7 billion number. The estimate of excess energy costs could be too high or too low. It includes the $26.3 billion in excess electricity prices incurred during the week of February 15 and the total amount ratepayers will be required to pay for some $8.6 billion in bondsthat will be issued to rescue the natural gas utilities and electricity suppliers who got walloped during the energy crisis.
Out of that $8.6 billion, about $4.5 billion will be issued to raise money for the natural gas utilities that lost hundreds of millions of dollars during the storm, $2 billion in bonds will be utilized by electric cooperatives, and up to $2.1 billion will be used by retail electric providers. If the state issues $8.6 billion in bonds at 3% interest and they are paid off over a 20-year period, the final cost to Texas ratepayers will be about $11.4 billion. That sum will be collected by adding a fee of several dollars per month to the bills of ERCOT ratepayers.
As I have explained in a February 28 article in these pages, it has been clear since the end of the storm that Texas ratepayers – and in particular low- and middle-income consumers — would ultimately be forced to pay the biggest costs after the storm. It is also increasingly clear that the deregulation of the Texas electricity market has been a mixed bag for consumers. Yes, deregulation may have resulted in lower electricity prices in the state for a few years. But now, much of those savings are being erased. As one longtime Austin lobbyist told me yesterday, “cheap energy that isn’t reliable, isn’t cheap.”