Costs of plant fixes may fall to Texans
Companies seeking to have consumers pay for the upgrades
Thanks to skyrocketing energy costs during the February freeze that paralyzed the state and killed hundreds of people, Texans will be paying billions of dollars in higher gas and electric bills for decades.
Now, energy companies are asking to pass on to ratepayers millions, even billions, in additional storm-related costs.
Last month, Gov. Greg Abbott signed into law new rules intended to strengthen an energy grid that failed Texans during a week of subfreezing temperatures. “Bottom line is that everything that needed to be done was done to fix the power grid in Texas,” he said at the time.
A major component of Senate Bill 3 was a requirement that electric companies weatherize their facilities to withstand future freezes — something lawmakers failed to do after a 2011 winter storm froze power equipment and caused rolling blackouts.
Yet the new law didn’t say who should pay for the upgrades. In recent filings with the Public Utility Commission of Texas, several large electric generating companies have said residents — not the investor-owned companies themselves — should cover the cost of weatherproofing their equipment.
Because the new requirements “represent a societal judgment that mandates an additional investment in additional extreme weather conditions,” it makes sense for the public to pick up the tab, Houston-based Calpine Corp. said in a filing.
The companies said that if
they had to bear the costs of weatherization, it could make the Texas grid less reliable.
Absorbing the costs might cause some companies to become uncompetitive in the cutthroat Texas energy market, which would force them to take generating facilities offline, said Texas Competitive Power Advocates, which represents electric generating companies.
“Companies without cost recovery will be forced to decide whether to invest in capital improvements or to retire or seasonally mothball those marginal units,” it said in a filing.
Ratepayer advocates said it is outrageous to ask Texans to pay essential business costs on behalf of the same electric companies that contributed to the grid’s near collapse five months ago by failing to prepare their equipment properly.
“Here we go again,” said Tim Morstad, associate state director of AARP Texas. “Private power companies that pocket profits during good times now seek to pad a fee onto ratepayer bills to pay for improvements they should have made long ago.”
With the billions in storm-related costs consumers already are paying, “we’re into our greatgrandchildren already,” said Jim Boyle, the state’s former public utility counsel, who represents consumers in utility matters. “How many times do we have to take a hit?”
Cost estimate: $430M a year
Inadequate weatherization of generating equipment wasn’t the only reason the Texas grid nearly collapsed.
Natural gas production tanked when wellheads and pipelines froze. Poor communication between the electric and gas sectors caused some gas production facilities to fail when their electricity was cut off. That interrupted the supply of gas to generating companies that needed it to produce electricity.
Still, a main goal of SB 3 was to prevent a future winter disaster by ensuring the equipment that powers the state’s grid could handle extreme weather.
After the 2011 winter storm, when frozen equipment caused rotating power outages for two days during Super Bowl weekend, state lawmakers vowed to make sure customers would be protected against extreme weather events.
But electric utilities and large industrial consumers protested that mandatory winterization would cost too much. By the end of that year’s legislative session, the single weatherization bill to pass required only that power companies file their winter plans with the Public Utility Commission each year.
This time around, the new law requires generators and transmission companies to weatherize their equipment enough to withstand a future severe storm. Failure to do so could result in a penalty of $1 million per day.
Yet the details of what weatherization will look like were left up to the utility commission. The agency has until September to write the necessary regulations, spokesman Andrew Barlow said. In the meantime, parties that will be affected by the new law have been submitting comments and suggestions.
Several electric companies warned against a one-size-fits-all rule, noting that a generation facility in Lubbock may require different cold weather protection from one in Houston. Older plants, too, may have different needs than modern equipment.
The companies also noted the challenge of installing insulation, windbreaks and heaters while having to protect the same generating equipment from intense summer heat several months later. “The commission should balance whether certain requirements for cold weather preparedness have a corresponding reduction in summer output,” wrote Vistra Corp.
Because details remain up in the air, estimates of the costs of mandated weatherization have varied widely. Some researchers have put it at billions of dollars.
El Paso Electric reported spending $4.5 million to winterize two generators. An April study by the Federal Reserve Bank of Dallas pegged the cost of winterizing the entire Texas energy system at $430 million a year. The study concluded that was a reasonable expense, compared with the damage February’s storm did to the state economy, estimated at $80 to $130 billion.
Ratepayers probably will end up paying many of the new mandated storm prep costs. Transmission companies can petition the Public Utility Commission for permission to charge higher rates to recover extraordinary costs. Municipal utilities and coops can obtain cash through local governments or members to upgrade their equipment.
A new threat to the grid?
In a regulated market, generators typically would recover such extra business costs by asking regulators for permission to pass them on to ratepayers. But in Texas’ deregulated energy market, companies assume those costs themselves in exchange for less government oversight and the opportunity to make bigger profits.
In their filings, however, the companies said having to spend millions of dollars on the new requirements could force them to reduce the size of their generating fleets, which would mean less power when the Electric Reliability Council of Texas, the state’s grid manager, needs it most.
“Imposing potentially costly requirements on generation resources … and leaving discussion of the associated costs for another day will likely cause certain generation resources to conclude that participation in the ERCOT market does not make economic sense when weighing the costs and risks, causing resources to prematurely retire or to never get built,” Exelon Generation Co. wrote in its filing.
“Such an outcome would exacerbate reliability issues on an isolated electric grid that is showing signs of being increasingly strained (even in nonpeak months), counter to the legislative mandate.”
Too bad, replied AARP’s Morstad. Energy companies that weatherized before the February storm were able to pay for their upgrades and still remain competitive, he said.
“Why should companies that failed to install weatherization be rewarded by getting a financial advantage over generators that did the right thing?” he said. “The deregulated generation market does not protect owners from bankruptcy or going out of business. That’s part of trusting the market. If a company can’t cover its required costs, it goes into bankruptcy and either restructures its financing or sells its generating assets to another owner who will pay the necessary costs.”
Whether state leaders intended for the companies or the public to cover the costs is unclear. The power companies say Abbott signaled that he wanted generators to be able to recover their costs when he directed the Legislature to mandate weatherization but also “to ensure the necessary funding.”
Consumer advocates respond that lawmakers had ample opportunity to approve public funding for weatherization — one failed bill would have used money from the state’s rainy day fund — but chose not to do so. That suggests they intended that the companies should pay for it, the advocates say.
Asking ratepayers to pick up particular costs incurred by generation companies “would be a dramatic departure” from the deregulated Texas system that has been in place for two decades, said Doug Lewin, a clean energy advocate who runs the consulting firm Stoic Climate and Energy.
Thanks to the mixed messages, “I don’t have a clear signal what the Legislature meant,” said Caitlin Smith, an energy analyst for AB Power Advisors.
For now, state leaders appear willing to let the tea-leaf reading continue. Abbott, Lt. Gov. Dan Patrick and Sen. Charles Schwertner, the author of SB 3, all did not respond to questions about the financial intent of the new weatherization legislation.