ERCOT’s SNAFU: $16 Billion? $30 Billion? (perils of central planning)

“Other than desperation, why would the commissioners have increased electricity prices to the point that Texans paid more for electricity in one week than they had for the last three years combined?…. At the heart of the PUC’s decision seems to be a belief in theoretical market constructs over actual markets.”

The Electric Reliability Council of Texas (ERCOT) is a government agency, advertised as a ‘nonprofit corporation.’ It is also a government planning agency, not a free-market institution, under the thumb of state regulators.

Planning agencies, Texan or Russian, make errors from what is called the knowledge problem, an economics term most closely associated with the Austrian economist F. A. Hayek. So, we should have seen it coming.

The $16 billion (or more) of electricity overcharges in Texas seem to have caught everyone by surprise, but the truth is they had been in the works for years. 

For the last decade or so, the Texas Legislature and the Public Utility Commission of Texas (PUC) have treated the Texas electricity market like California and New York treat their poor performing grids. Seemingly no regulation, no subsidy was out of bounds for what once had been the most competitive and successful electricity market in the world. 

Yet despite the $23 billion of subsidies for generators–mostly renewable–and constant meddling by regulators, there was still enough market left to keep the lights on. All that was needed, though, was one spark to send the whole thing up in flames. 

That is about what we got when Texas was hit by the winter storm that sent temperatures to record lows across the state in mid-February. Once that happened, there was little anyone could do to overcome the years of market-meddling and rapid growth of unreliable renewable energy at the expense of natural gas- and coal-fired generation.

However, as everyone now knows, the PUC tried. Perhaps understanding the precarious situation they had left themselves–and the rest of us–in, the three PUC commissioners decided late in the afternoon of Monday, February 15 to raise the price of electricity to $9,000 per megawatt hour (for comparison’s sake, prices as this piece was written were about $17).

As a result, electricity prices were artificially increased by as much as $30 billion over the next three and a half days or so. Many generators and the natural gas industry benefited from this windfall at the expense of Texas consumers and other market participants.

Other than desperation, why would the commissioners have increased electricity prices to the point that Texans paid more for electricity in one week than they had for the last three years combined?

One explanation might be that the PUC was attempting to incentivize downed generators to come back online. If that was the case, it did not work. Generation outages continued until temperatures warmed and repairs could be made.

At the heart of the PUC’s decision seems to be a belief in theoretical market constructs over actual markets. In their order, the commissioners wrote, “ERCOT has informed the Commission that energy prices across the system are clearing at less than $9,000[,] as low as approximately $1,200. … Energy prices should reflect scarcity of the supply. If customer load is being shed, scarcity is at its maximum, and the market price for the energy needed to serve that load should also be at its highest.” 

At the time, the new PUC chairman, Arthur D’Andrea, noted, “I think we all expected that when we were in load shed we would be at $9,000.” In other words, the commissioners did not care what market prices actually were. They were going to impose their vision on the market, regardless.

Calls for reversing a portion of the overcharges have grown steadily since Potomac Economics, the PUC’s independent market monitor, weighed in. Texas’ governor, lieutenant governor, senate, and media outlets have called for refunding the $16 billion overcharge identified by Potomac. 

However, $16 billion is not enough. The PUC or the Texas Legislature should reverse the more than $30 billion of overcharges imposed by the PUC on Texas consumers. 

Potomac fell into the same trap as the commissioners when claiming that the initial price hike made sense. In fact, there was never a reason to increase the price to $9,000. The lower market prices were rational; in the depth of the storm, there simply was not any generation that could come back online no matter no matter how high the price might be bid up.

Additionally, the PUC exceeded its legal authority in setting the price of electricity. Though it claimed “‘complete authority’ over ERCOT,” the Texas Utilities Code only gives the PUC “complete authority to oversee and investigate the organization’s finances, budget, and operations as necessary to ensure the organization’s accountability [for its] functions and duties.” ERCOT manages the market, not the PUC.

The PUC’s action also contradicts the Legislature’s express intent “that the public interest in competitive electric markets requires that … electric services and their prices should be determined by customer choices and the normal forces of competition.”

Opponents of reversing the PUC’s error claim that what the PUC did was just following the rules and that market participants should have expected it. 

However, the opposite is the case. As the Wall Street Journal reported, the PUC “took the unusual step of abandoning the market-based pricing mechanism.” No market participant could have expected prices to remain at $9,000 for more than three days when the longest that had occurred in the past was three hours.

Refunding the $30 billion plus is the right thing to do–ethically and economically. Texas consumers and blindsided market participants–even renewable generators–deserve a full refund of the overcharges from the PUC’s blunder. Just as important, unwinding this mess may be the only way to save what is left of competition in the Texas electricity market. 

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An earlier version of this post was published at Excellent Thought: Faith, Policy, and Culture by Mr. Peacock.

The post ERCOT’s SNAFU: $16 Billion? $30 Billion? (perils of central planning) appeared first on Master Resource.

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March 17, 2021 at 01:12AM

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