Ed Hirs is an energy fellow at the University of Houston.
President Reagan famously said, "The nine most terrifying words in the English language are, I'm from the government, and I'm here to help." Texas is living proof, and the most recent evidence is that Texans are shocked to learn they have been overcharged by $12 billion for electricity. No new power plants were built. That $12 billion is pure profit for generators and will be reflected in the bonuses and share buybacks at yearend — and ongoing campaign contributions for many incumbent lawmakers in Austin, the state capital.
Why is this happening? It’s really quite simple: the way Texas delivers electricity to its residents was promoted as a shining example of the power of free markets to deliver value to customers, but what really happened is that the government took direct control of the electricity generation market. This is no fiction. Conservative Chief Justice Nathan Hecht of the Texas Supreme Court wrote in a majority opinion earlier this year that ERCOT, the Electric Reliability Council of Texas, is an “arm of the state.” It is language most familiar to students of the former Soviet Union.
ERCOT operates the electric grid for approximately 90% of the Texas population, or 26 million people. Texas followed California by “deregulating” its electricity market in the early 2000s. Not only does ERCOT call up generators and dispatch power, but it acts as the market-making entity in the wholesale market. ERCOT is the sole buyer facing generators and the monopolist facing consumers. Funny that.
Promoters of the Texas-style deregulation argued that the old system of entrenched monopolies cost Texas consumers too much money. They argued that a government bureaucracy could save consumers money. Wrong. The evidence is straightforward. The Wall Street Journal reported Texans overpaid $28 billion for electricity prior to 2021 due to the ERCOT market design. Add in the costs of the February 2021 winter storm: 246 dead, $2.1 billion in government mandated bailouts, and economic losses estimated by the State of Texas to have been more than $100 billion. And now add in $12 billion.
The laws deregulating the California and Texas grids broke utilities apart by function. Transmission and distribution providers remained under regulated rate of return regimes. The power plants were left to be directly managed by CAISO, the California Independent System Operator, and ERCOT as the wholesale market makers for power plants. Under the prior system, vertically integrated electric utilities built enough generation capacity to service peak demand. Because of this mandate, some power plants were idle for months out of the year. Under the new California and Texas market designs, idled plants received no revenues. Over time, the owners of these idled plants closed them or, at the very least, cut back on reinvesting and maintaining these plants. It saved consumers some money in the very short run.
Today is different. The government-designed and managed markets have created a shortfall in power generation during periods of peak demand in winter and summer. Power plant owners — including wind and solar farms — benefit from skyrocketing prices. The market designers still argue that such short-term price spikes will encourage long-run investment, but they have never played poker. Why would power plant owners build more power plants just to make sure prices stay low?
Today, the power plants on the ERCOT grid, including batteries, wind and solar farms, have the upper hand, and ERCOT is acting as their agent against consumers. Monopoly 101 is characterized by reduced supplies and dramatically higher prices, and ERCOT is certainly acting like a monopoly — withholding supply to drive up prices. It’s the very thing that “deregulation” was supposed prevent.
In contrast, El Paso Electric is outside of the ERCOT service area and subject to regulatory oversight by the Federal Energy Regulatory Commission, the Public Utility Commission of Texas and the New Mexico Public Regulatory Commission. El Paso Electric is allowed a return on investment by the regulators, and because of this, El Paso Electric could afford to undertake the weatherization and hardening of its micro-grid that allowed it to operate with little interruption during the winter storm of February 2021.
The best solution is a free market solution. A vertically integrated utility such as El Paso Electric maintains complete control of its supply chain to fulfill its contracts to deliver electricity to customers. The utility optimizes its own portfolio of resources. When additional investment is required to serve more customers, the regulators approve or deny the investment. When approved, the utility can make the multiyear capital commitment knowing that the revenues will be there to cover the costs.
State control of the electricity supply chain has proven disastrous. The solution is for Texas to return control of its grid to its utilities. The state regulated incentive to game the ERCOT market should be removed. The state can go back to enforcing utility contracts and imposing accountability on utilities in return for reliable and fairly priced electricity for 26 million customers. The state can go back to an oversight role and put the business of delivering electricity back into the hands of business.