“Confusion now has made its masterpiece!” — William Shakespeare, “Macbeth”
CPS Energy, the municipal electric utility serving San Antonio and the surrounding area, has won the first skirmish against the Electric Reliability Council of Texas (ERCOT), the state grid operator, over charges resulting from the deep freeze in February. The district court in Bexar County granted a temporary restraining order sought by CPS Energy to keep it from being forced into default and to prevent ERCOT from seizing collateral payments.
At the core of the order by State District Judge Aaron Haas is a prohibition against attempts by ERCOT to charge its losses across viable utilities — those that haven’t sought bankruptcy protection, as several have. Brazos, for example, the state’s largest electric cooperative, opted for Chapter 11 bankruptcy protection at the end of February, when it was charged $1.8 billion by ERCOT.
ERCOT is now seeking to recover $47 billion in electricity charges and $6 million associated with a software error; both amounts are related to the February deep freeze. It is attempting to recover these costs from all market participants, including CPS Energy, by creating a pathway to money it held as collateral. ERCOT started the process to make claims against all market participants’ credit and collateral last week but had to reverse its actions as a result of the order.
The convoluted backstory starts with Texas being woefully unprepared for the arctic blast that battered it. In 2011 there was a severe winter storm which, everyone agreed, demanded that the utilities and their natural gas suppliers should be weatherized, but it wasn’t done. Ten years later, ERCOT was warned by its meteorologists of the approach of the huge storm in February, but they didn’t allow for its impact nor take such prophylactic action as they could.
When the storm hit, some wind turbines froze, solar installations were iced over, one nuclear unit failed, and some gas instrumentation and handling equipment seized up. So, apparently, did the ability to handle the crisis at any level from the governor’s office down through the Public Utility Commission of Texas (PUCT) and to ERCOT. Confusion took over.
Texas has an “energy only market” in which generators who sell through ERCOT aren’t required to provide safety margins, as in the capacity markets which operate across the rest of the United States. It was the ultimate pure – even primitive — market for electricity and it collapsed. It did so because the whole electric supply chain collapsed.
The motivating idea of the Texas electricity market is that increased prices will bring forth increased generation. It didn’t in February: There wasn’t any power to be had. Prices skyrocketed from $30 per gigawatt hour to roughly $9,000 per gigawatt hour — a cap mandated by the PUCT. ERCOT let them stay in the stratosphere for the whole duration of the storm, and then for an additional 32 hours, even after ERCOT’s load-shedding emergency had ended.
This resulted in a $16-billion overcharge, according to the PUCT’s independent market monitor, Potomac Economics. What is more, there was a window in which, by its own protocols, ERCOT could have repriced, eliminating that $16-billion overcharge. It didn’t – and PUCT didn’t order it to reprice as the market monitor had recommended.
Those gas suppliers that were able to remain online made huge profits. They have been roundly accused of unlawful price-gouging.
CPS Energy’s community-caring chief executive, Paula Gold-Williams, has said often in many forums that the utility will pay what it owes and work out the impact on its customers over years, if necessary. But she is adamant, as is San Antonio Mayor Ron Nirenberg, that the utility, acting as the agent for the people in its service area, won’t concede to what it and the complaint before the court call “illegal charges.” The mayor has gone so far as to say that the power crisis during the deep freeze amounted to the greatest transfer of wealth in the history of Texas.
Force Majeure Invoked
Clinton Vince, chairman of the U.S. Energy Practice at Dentons, the world’s largest law firm and the Washington-based outside counsel for CPS Energy, who is directing the Texas litigation, tells me confusion has reigned in ERCOT and in the PUCT. The CPS Energy complaint, incorporated into Haas’s order, invokes “force majeure” as enshrined in the Texas constitution and invoked by Governor Greg Abbott when he declared an emergency during the storm. When the case comes to trial that may be crucial.
Later, Abbott and Lieutenant Governor Dan Patrick found themselves at odds over the $16-billion charge – with Abbott supporting ERCOT and Patrick supporting re-repricing. Attorney General Ken Paxton offered a legal opinion stating that both ERCOT and the PUCT had the authority to reprice.
In the aftermath of the blackout, which affected 65 percent of Texans, the two remaining members of the PUCT resigned under bipartisan pressure, and Abbot then fired the president and CEO of ERCOT, Bill Magness, and requested that its out-of-state board members resign. The governor then appointed Arthur D’Andrea as PUCT chairman and sole member. After a two-week tenure, he was forced to resign for having given bankers — in an ex parte recorded phone call — assurances that he would “tilt the scales in their favor and against repricing.”
The Texas Legislature has held hearings, but no relief has been passed. This session is over at the end of May, and the legislature isn’t scheduled to meet until 2023.
CPS Energy will be back in court May 12. CPS Energy lawyers are seeking to convert the ground-breaking temporary restraining order into an injunction, which would be in effect until the case is decided at trial, probably within a year.
This Texas-size confusion is at utter odds with the state’s mythology of being well organized where business is concerned.