A cold week in Texas
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The Texas electricity market failed. In the words of ERCOT, the Electric Reliability Council of Texas, it functioned just as designed. ERCOT congratulated itself for losing only 40% of the grid and is proceeding to settle transactions to transfer more than $50 billion from consumers to electricity generators. Why is there such an obvious disconnect?
The core premise of effective governance is that the officers and directors of any entity understand the business they govern. The late Paul W. MacAvoy would state it this way: The purpose of the board of directors is to assist the CEO to develop the corporation’s strategy and then monitor performance. If performance is not up to expectations, the board must ask two questions.
· Is the strategy correct? If so, then the CEO is fired for failing to execute.
· Is the strategy at fault? If so, then the CEO who developed the plan must go because a fresh start is needed.
With the Texas grid failure, the blame game from ERCOT and up through the chain of command above ERCOT indicates one of two things—the ERCOT board, Public Utility Commission, legislature and executive leadership of Texas never bothered to learn the business, or they turned a blind eye.
ERCOT has two duties. The first is to manage the flow of electrons around Texas. Optimize. Call for generators to switch on. Shift electrons from one node to another. It is a complex system calling for instantaneous real-time automation and telecommunication. The goal is to provide consumers with reliable electricity.
The second duty is to manage and maintain an efficient, transparent electricity market. The goal is to provide consumers with cheap electricity.
These two duties are in conflict. And ERCOT’s management failed spectacularly on both counts.
The Blank Check
Can you trust this leader, regulator, company, or brother-in-law with a blank check? Texans did. Texans owe Texas electricity providers more than more than $50 billion for a few days of electricity. Let that sink in. It is one of the great fleecings of all time.
During the emergency ERCOT unilaterally raised the price offered to generators to the cap of $9,000 per megawatt hour, or $9.00 per kilowatt hour—and even higher for some ancillary services. Generation companies knew that increased demand against a constrained supply would skyrocket prices—it is a game taught in MBA programs. ERCOT has stated that it will pay the generators. If so, and if the free market Texas legislature does not step in, consumers will face the outcome expected when a monopolist runs a market: much less service at much higher prices. It was price gouging on a monstrous scale even as the governor was publicly asking to hunt down people charging $10 for a bottle of water.
With damage estimates alone approaching $90 billion, the total cost is rapidly approaching $140 billion to which must be added the dozens of lives lost due to hypothermia and disconnected life support equipment.
Where is the accountability?
The Chair of the Public Utility Commission resigned and blamed everyone for not heeding ten years’ of warnings. Why did she take the job in the first place? ERCOT’s out of state directors have left. One astutely observed that the ERCOT system collapse was a Texas problem. Others are trickling out the door. Resigning will not save them from the days ahead of excruciating depositions and examinations.
The opaqueness of ERCOT is well-known. On one hand, ERCOT claims sovereign immunity, a royal doctrine that claims immunity from lawsuits as a government entity. On the other hand, ERCOT steadfastly claims that it is not subject to open records requests because it is a private enterprise. The Texas State Supreme Court will decide this issue shortly.
When challenged on outright market manipulation, ERCOT routinely decides in favor of generators as it did in 2014 when one company ripped off the public for more than $300 million—a spectacular amount that was highlighted by ERCOT’s Independent Market Monitor. Today, that role is played by a person hired directly from ERCOT. Revolving door?
ERCOT is overseen by the Public Utility Commission of Texas. The three commissioners are appointed by the Governor and currently includes a former spokesperson for ERCOT. A revolving door. The PUC commissioners under Governor Rick Perry included a panel comprised completely of right-of-way lawyers who rubber stamped massive expenditures on transmission lines across the state. PUC commissioners incur no costs for the consequences of their actions.
Undoubtedly the generation companies will be vilified not just by the public but by their shareholders. It’s a cinch that their own employees suffered. Not having equipment ready to respond to the polar vortex may be malfeasance, or it may be willful conduct and tacit collusion with other generation companies to force the ERCOT market into a short squeeze. The payoff? Driving the average $36 per megawatt hour price to $9.000 per megawatt hour is a powerful incentive. Legal? Unconscionable? Who else helped themselves to $50 billion during week of February 14?
Many will dissect the failures in terms of molecules-and-electrons. But the genesis was the failure of leadership by the Texas government, the Public Utility Commission of Texas, ERCOT, and the generation companies. The investigations will determine if they were incompetent or dishonest.
