How the Legislature can stop blackouts
Texas lawmakers should create a ‘rainy day’ reserve for electricity, too
Texans take pride in our state’s distinctive culture, but not in our latest distinction: During the harsh winter weather that recently covered much of the nation, we led in the numbers of our residents who froze for days without power. Our state’s electric power system failed in many ways, but most stem from two related problems: the failure of the state’s Public Utility Commission to make reliability an overriding priority and the Legislature’s failure to give the PUC the necessary mandate and tools to obtain it.
In 1999 the Legislature made
sweeping changes in the structure and regulation of electric power. Before those changes, most utilities generated power, managed the wires and sold it to consumers. Every year expert regional organizations undertook scenario planning and set “reserve margins” to ensure reliable power during extraordinary events. The North American Electric Reliability Council, on which I served two decades ago, reviewed those regional plans. Utilities then made investments consistent with those plans. The PUC expected utilities to avoid blackouts and allowed them to recover reliability-related costs and a regulated return.
Critics of this system — ranging from academic economists to environmental groups to some potential competitors — argued that utilities had insufficient incentives to avoid investments in inefficient and excessive capacity. For example, consumers ultimately paid for cost overruns that plagued nuclear projects.
In Austin powerful potential new competitors such as Enron fought with equally powerful utility monopolies to open the power business to greater competition.
In part with the able leadership of Pat Woods, then chairman of the PUC, in 1999 the Legislature compromised by opening competition for retail sales and power generation, while preserving a rate of return on existing generation. Transmission and distribution — “the wires” — continued to operate as regional monopolies that could recover costs and regulated returns. Environmental groups claimed victory with a phased-in requirement for the purchase of renewable power, which helped jumpstart the wind business and made Texas a leader in renewables.
The new system gave consumers more options, though studies — such as a recent one by the
Wall Street Journal — now question whether that ultimately resulted in lower consumer prices. That issue also received greater scrutiny after the February freeze, as many consumers failed to understand the fine print about variable rates.
PUC lacks needed tools
The lack of guaranteed returns on new projects forced their owners and operators to be far more sensitive to costs. Any tendency of the old system to create grossly excessive generation capacity had been curbed. On the flipside, however, the new system did not give the PUC the clear responsibility, accountability and all the tools needed to replace the old system’s capacity to avoid cascading blackouts during extreme weather events. The new system retained the historical planning and spreading of costs designed to ensure reliable wires, but no similar mechanism remained for ensuring a reserve of reliable generating capacity. In the words of an expert report to the PUC in 2012, in the wake of power interruptions during a winter storm the previous February, Texas is the only state that fails to “maintain a minimum reserve margin through regulated planning, resource adequacy requirements, or capacity markets.”
Avoidance of uncontrolled blackouts requires a grid operator to continually balance power placed into and taken out of the system. Skilled engineers and operators working for the nonprofit Electric Reliability Council of Texas — ERCOT — have performed this function, both before and after the 1999 legislation. ERCOT does have the power to interrupt service for some users to avoid a collapse of the entire grid, and certainly this can be done better to avoid situations such as occurred during the February freeze, when it turned off power needed to get natural gas to gas-fired power plants. ERCOT, however, does not have policymaking or regulatory power. The PUC — appointed by the governor — must play that role.
Market forces alone will not ensure reliability. So much of modern life depends on reliable power — from homes to businesses, from gas pumps to water pumps, from refrigeration to computers and phones. So the human and economic costs of a prolonged and extensive outage can vastly outweigh the economic reward to investments serving principally as insurance against rare but potentially catastrophic events. Policymakers, not engineers or Wall Street investors, must ultimately weigh those trade-offs between spare capacity or improvements and the costs that consumers should bear for a reliable system.
‘Rainy day’ reserve
For this reason, other states and almost all developed countries have some means of securing reserve capacity and spreading the cost over time and all users. Texans do not value reliable power less than those in other states, and insurance against catastrophic or unpredictable events does not conflict with our state’s market orientation. After all, virtually all businesses buy insurance to spread the cost and reduce the risk of losses from extraordinary events, and Texas itself puts some tax dollars in a “rainy day” reserve.
The Legislature cannot micromanage the power system, which requires deep attention to technical detail, annual scenario planning and a careful weighing of trade-offs with public input. The Legislature can, however, act promptly while Texans remember the February freeze to give a clear mandate and authority to the PUC to make reliable power a high priority and take ultimate responsibility for the entire range of reliability challenges, such as power interruption priorities, appropriate standards for weatherization, risk-based and coordinated planning of maintenance downtime, and competitive procurement of reserve power. ERCOT, with its deep technical expertise, can manage and be held accountable for policy implementation, but it must be accountable to a regulatory body with thoughtful commissioners and a qualified, professional staff.
I brought this issue to the attention of Austin policymakers when I served as Houston’s mayor, and after leaving office identified needed reforms.
We may not be able to avoid all hardship during all extraordinary weather events, but we can at least learn from them and seek to do better. While Texas takes pride in its entrepreneurial culture, successful entrepreneurs constantly modify their plans based on actual experience.