High court hears arguments on power prices during 2021 freeze
The Texas Supreme Court heard oral arguments Tuesday in a case closely watched by the state’s power industry alleging the Texas power grid regulator overstepped its authority during the deadly 2021 freeze when it allowed wholesale electricity prices to stay at the maximum cap for several days.
The Public Utility Commission of Texas, the state’s utility regulator, appealed the case after the Third Court of Appeals ruled in a surprise decision that its orders increasing the wholesale price of electricity to $9,000 per megawatt-hour cap for five days during Winter Storm Uri were “invalid” and an “operation of executive fiat.”
If that decision is upheld, it would throw into question what should be done about the billions of dollars power generation companies made selling electricity at the $9,000 rate. In the wholesale electricity market, power generation companies sell electricity produced by their power plants to retail electric providers, who sell it to residential and commercial customers.
Persistent freezing weather impaired power plants’ abilities to operate in February 2021, sending prices skyrocketing and pushing the state’s grid operator, the Electric Reliability Council of Texas, to order outages to prevent a total collapse of the grid.
On Feb. 15, 2021, the first day of the outages, the Public Utility Commission of Texas set wholesale electricity prices at its cap in an attempt to incentivize more power plants to sell electricity to the grid. Prices on Feb. 15 had been as low as $1,200 per megawatt-hour but had frequently bumped against the $9,000 cap. Under normal conditions, the wholesale price hovers around $30 per megawatt-hour.
Several retail electric providers filed for bankruptcy or went out of business as a result of being forced to buy power at the cap. Some customers with direct exposure to wholesale prices were saddled with electricity bills costing thousands of dollars for a few days of electricity. And for nearly two days after widespread outages ended, prices remained set at the cap, resulting in $16 billion in overcharges to power companies that could be passed down to consumers.
The case was brought by Luminant, an electric utility that both buys and sells electricity on the wholesale market. Luminant’s parent company, power generation company Vistra, said it lost at least $1.6 billion during Winter Storm Uri because it paid “incredibly high costs” for natural gas to run its power plants and had to buy electricity at or near the price cap to meet its supply obligations when it still lacked adequate natural gas to generate at full capacity.
Power generation companies Calpine and Talen Energy joined the PUCT in petitioning the Texas Supreme Court to overturn the appellate ruling.
Lanora Pettit of the Texas Attorney General’s Office, repre
senting the PUCT, argued Tuesday that the price cap was meant to correct for market errors that kept prices lower than they should be because outages made it seem like there was less electricity demand on the grid. She said everybody in the market understood that the $9,000 rate was the price that would be charged if outages occurred.
“What happened here was … a direction to ERCOT that your algorithm’s not working the way it’s supposed to, so please go fix it and get in line with the rules we’ve already established,” Pettit said.
In response to Luminant’s claims that the PUCT’s order was anticompetitive, Macey Reasoner Stokes, a Baker Botts partner representing Calpine and Talen, said there must be a reliable electric grid before a competitive electricity market is possible. The appellate decision didn’t say what the PUCT should do instead of its price cap decision in the next emergency, she said.
“Some of the respondents go so far as to suggest that the PUC should’ve stood by and risked the collapse of the entire grid in the name of unfettered competition,” Stokes said.
Allyson Ho, a Gibson, Dunn & Crutcher partner representing Luminant, said the Texas Legislature has banned the PUCT from setting prices by “regulatory fiat” under the Public Utility Regulatory Act.
“The agency did the one thing that the Legislature expressly said it could not do, and that is set prices,” Ho said.
Luminant has argued that the PUCT’s order holding prices at the price cap didn’t achieve its intended purpose of incentivizing more supply because generators were unable to produce power regardless of how much they would earn. Justices Jimmy Blacklock and Jane Bland questioned whether they should consider how effective the agency’s action was.
“Does it matter at all if this is what actually helped save the grid?” Blacklock said.
In response to Luminant’s argument, Bland noted that the Legislature had decided against repricing and instead adopted a securitization plan that would spread out the costs of the 2021 storm over a longer period of time.
“What do we do with that in connection with your argument that the prices need to be unwound?” Bland asked.
A decision is weeks away.