Regulator under fire over power price

Retail electricity companies had to purchase supply at extreme rates during winter storm

With power generators knocked offline and outages rolling across Texas on Feb. 15, wholesale electricity markets in Texas presented a puzzle. Power was trading between $1,000 and $2,000 per megawatt-hour, a very high price, but not one that reflected the severe power shortages crippling the state.

That evening, the Public Utility Commission stepped in, ordering the state’s grid manager, the Electric Reliability Council of Texas, to declare a level three emergency and push wholesale prices to the maximum allowed, $9,000 per megawatt-hour, where they stayed for much of the next few days.

That move, however, has proved controversial, particularly among retail power companies that were forced to buy electricity at the astronomical rates — about 300 times the typical $25 to $30 per megawatt-hour — and pushed toward insolvency. Just Energy blamed “artificially set” prices that contributed to an estimated $250 million in losses, diminished its cash and raised questions of whether it can stay in business.

Griddy, whose customers pay wholesale prices and face power bills in the thousands of dollars, has accused the PUC of “market manipulation.”

Industry analysts and energy economists, however, say the PUC was justified in pushing prices to the limit as regulators sought every incentive to get generators online and producing power. Experts add that retail power companies finding themselves in trouble share the blame. It’s likely that they relied too heavily on spot markets and did not secure enough power for customers through long-term contracts, a risk management strategy known as hedging.

It probably appeared cheaper to buy on the spot market to these retailers, which did not anticipate the high demand and soaring prices of last week, said Peter Hartley, a faculty scholar at Rice University’s Baker Institute for Public Policy.

“They could have signed long-term contracts that would have protected them against those prices,” Hartley said. “But (generally), with a long-term contract, you’ll pay a larger average price.”

ERCOT and the PUC likely were using any incentive they could to keep power flowing through the grid, said Adam Sinn, president of electricity trading company Aspire Commodities.

“ERCOT was worried because the grid had just suffered blacking out,” Sinn said. “The grid operators were nervous and did everything they could to prevent that from reoccurring. They were looking out for the best interest of restoring generation capacity to Texas.”

Sinn, however, said the emergency order was kept in place too long. It could have been lifted last Thursday around midday, he said, as moderating temperatures lowered demand and more generation returned, instead of waiting until Friday.

Sinn, who owns small power generators, said he earned about $400,000 during that period, which he donated to charity.

In testimony before the Legislature on Thursday, the chair of the Public Utility Commission, Deann Walker, said state officials should review whether prices should be kept at $9,000 for extended periods during such emergencies. She conceded that pricing strategy did not work because power supplies remained short and outages lasted for days.

But she defended the PUC’S move to lift prices to the state cap as necessary to ensure that all available generation was up, running and selling into the market. In a statement, the PUC said, “These peak prices are paid by wholesale buyers that have failed to purchase power in advance to hedge risk exposure for their customers. They are also paid by generators who do not generate power that they have committed to provide. This acts as a penalty for generators who fail to show up when needed.”

ERCOT estimates that retail power companies and other buyers ran up bills totaling about $20 billion over two days, the grid manager’s CEO, Bill Magness, told lawmakers Thursday. Some companies may not be able to pay those bills and could end up in bankruptcy.

Ed Hirs, an energy fellow in the economics department at the University of Houston, said the costs of the power crisis and who pays them will become controversial.

“All the guys that won big will insist on collecting,” Hirs said. “And those who lost big are going to scream foul.”