Texas Power Grid

This is what I've warning about. Texas gas utilities spent $10 billion in supply that week, and they will pass on all the costs to their consumers. Gas bills will go up a lot. They'll likely pass this securitization bill to keep the sticker shock down, but we'll be paying it for 10-20 years. Is this the fault of deregulation? No. Texas gas utilities are old-style fully regulated utilities. That is the reason we have to pay now. Most competitive firms take on supply risk; regulated utilities do not.

I listened to a Railroad Commission hearing recently where execs from gas utilities testified. Except for the big guys like CenterPoint and Atmos, they don't even hedge. As consumers, we are exposed to international wholesale commodity markets for gas and don't even know it.

 

I just mean that wind turbines in Texas were generally not winterized as you describe. They do it in more northern states or they'd never produce in the winter. They saved a couple bucks not doing it in Texas and missed out on the $9k/MWh. Hopefully, that changes the investment case. Gas wells froze off, but they still increased their production overall to meet the challenge, they just didn't increase enough (and there was trouble getting gas out of storage because of blackouts). Gas gets the blame because they have the responsibility to come through when the chips are down. If wind wants to be Texas' marginal fuel, they'll need to at least match gas' reliability -- which apparently isn't that high a bar to achieve, but they can't even do that.

Don't know if you're all that interested, but I have found the Order from the RRC authorizing the charges. Link. They have 18,000 customers. They spent almost $30 million extra on gas -- about $1,600 per customer. The Railroad Commission has authorized them to collect that much over the next 18 months. Some customers are commercial, which will skew the average, but that's roughly ~$90/month per customer for the next year and a half. And what's a usual bill in Magnolia? 30 bucks?

 

Thanks for tracking it down. Our bill varies by month. Last month our total bill was around $165. This month about $122. We have a gas furnace, stove and I have the grill outside connected to the gas. I think we ran the gas fireplace twice last month.

From folks in neighboring communities other providers (Epcor in Magnolia, Centerpoint in The Woodlands) haven't included a similar charge yet. but it sounds like Centerpoint will start in May. Seems that the least Unigas could have done was provided a month notice so you could complain or move really quick.

edit: Here is someone else's bill...

 

I think that's why they are leaning in so hard is because they knew this coming and a lot of folks are gonna be upset.

They had to repay all those energy companies and let them raise prices.

 

Privatize profit via lax regulations. Socialize cost when it bites.

 

Looks like complaints worked...

 

So has the state actually done anything constructive other than shutting down Griddy, a company that did what they said they were going to do and passed on costs that the state allowed if not encouraged the producers to charge?

 

They are going to do what? Extend the 'repayment' over more times to reduce the monthly bill? Someone has to pay, and it's going to be the consumers and businesses, while the profit is with a few guys that were able to provide gas during the storm. Guys who knew that failure of this magnitude is huge profits for them. Anyone sees an incentive here that works for consumers?

The incentive of free market is maximum profit and TX tried a, and I admit that I still do not fully understand, complex system of injecting pseudo free market principles to essential what is a utility without strong government oversight and regulation, or actually, with oversight and regulation by the industry itself since the Gov gets to appoint the overseers and we all know how much the Gov is responsive to contribution and support by large and powerful energy interests.

I doubt I see it, but one real reform is to break that chain - overseers should be independent of the industry it looks over. The governor of TX should not be able to appoint members. At least 51% of voting power of the overseers should be represented by consumer interest - make it a requirement.

 

Thanks for the customer view. From the order yesterday, they were going to chop up the $30 million they owe into equal monthly amounts ($1.67m/month), and then distribute those costs to customers according to the volume they use that month. So, in a low-usage month, each mcf costs more, and in each high-usage month, they cost less. And you just need to use less than your neighbors to avoid high surcharges. I'd recommend bbq with charcoal and make fires with wood for awhile. Consider maybe an electric dryer instead of gas.

Again, that's not it. This is the same mechanism we've been doing all over the country for a half-century or more. Gas utilities are not restructured in Texas; they're fully regulated. They need the state of Texas to look at all their prices and judge whether they are "fair and reasonable." This is how they do it in California, Kansas, Vermont, everywhere you do not have a competitive retail market. Distribution utilities make their money on delivery. They buy the supply for customers from gas companies and then divvy up the costs per a formula approved by the utility commission. They don't make any profit on supply and they don't assume any of the risk. They make all of their money on distribution charges.

This is actually the crux of the debate on restructuring the power market in Texas. We used to have volatile gas markets that played havoc with power customers because they bore the risk of the wholesale markets. We invented a better mousetrap, a market in which customers would shift the risk of the wholesale markets to retail companies, and the retail companies could have trading desks to hedge the wholesale risks. It has worked. When there is volatility in the wholesale markets, shareholders take the profits and losses, while customers just pay their contracted rate. But in 2009, we had the shale revolution that has made gas markets cheap and stable for a long time. Hedging hasn't been that important for the last decade. Companies that don't hedge -- like the un-restructured gas utilities or companies like Griddy -- could bet against volatility and win. Until something like Winter Storm Uri when it suddenly and expensively becomes obvious that they've been exposing their customers to risks they don't understand.

The problem here is not "deregulation." It's actually that we continue with an antiquated regulatory compact that mis-assigns wholesale risk to customers who cannot manage such risks. We need to do to gas utilities what we had done to power utilities 20 years ago.

I don't see any new order on their docket, but maybe it'll post soon. There is an effort right now in the state legislature to pass a securitization bill. That bill would bundle up all the Uri costs into a big $10 billion bond issued (and guaranteed) by the state of Texas to get the cash to pay back the utilities for all of their extraordinary costs. That's the cheapest way to get a loan, essentially. Bondholders would be slowly paid off over many years, maybe 10 or 20. The money to pay those bondholders would be funded by a rider on gas bills over the same duration. So gas customers will still pay the full $10 billion (plus interest), but spread out so it won't hurt so much.

There are also some relief bills that would essentially shift responsibility from you as a gas customer to you as a taxpayer, which strikes me as rearranging the deck chairs on the Titanic. I don't what Unigas is planning right now -- maybe they'll just wait for the securitization bill like everyone else -- but don't be tricked into thinking you won't have to pay. You will.

It's going to take awhile. But my guess is that they'll make cosmetic legislative changes they don't help (weatherization) and fail to make the big structural changes needed (interconnect with the Eastern Grid, restructure gas utilities and the remaining pockets of regulated power utilities). But the PUCT will have to fix things quietly with regulatory action when people stop paying attention.

I think you intuition is right -- we have a hybrid system with some regulated players (gas utilities) and some competitive (the oil and gas industry) and it's a bad idea to mix. I know your preference might be to go up the food chain with regulation, but I'll humbly submit that's not realistic. Oil and gas is a global market, and one from which Texas derives considerable wealth. We can't realistically compete with Russia and China and Saudi Arabia, etc if our E&P companies have to submit to a utility regulation construct where they can't take market prices during scarcity. So, let's go the other way and revisit the regulatory compact. If we're free market at the wholesale level, be free market at the retail level. The most glaring problem (always, but especially now) is that risk is not carried by the parties. Customers are taking wholesale supply risk when they don't know what to do with it. Make shareholders take that risk. Yes, they will make some profit to compensate for the risks they take. But, if there are many competitors, they will have to keep their prices efficient. And yes there will be some dishonest marketing like we see with power companies. That is a good place to apply strong regulatory oversight.

 

Thanks for adding information. Curious, do you work in this field?

A couple of questions... is the newly renamed Unigas charging customers for the dramatically increased price they had to pay suppliers during the freeze? If yes, how is this different from what Griddy did?

Seems this unusual instance (at least that's how Unigas describes it) seems like something the government could help with since some of the problem stemmed from political decisions (eg, not connect to other grids). Isn't there a "rainy day" fund that could be used to pay for part of this? Seems fair that Unigas also bear part of the total costs... passing along some of the costs to consumers. Aftr all, didn't they also participate in decisions involving weatherization?

btw, thanks for the suggestions. While I could get a cheap charcoal grill to avoid gas use, I don't think adding an electric dryer is realistic (for cost or space... couldn't even stack the electric dryer on top in our small laundry room. Only used the fireplace twice after the electricity went out couldn't use the gas heater and won't be using it again any time soon.

 

Yeah, I'm in power and gas, but I won't name the company because I don't speak for the company (these views are all my own, yada yada). To answer your question, yes, all regulated utilities are like Griddy in that respect. Companies at the retail end have to deal with wholesale risk somehow. The traditional utilities would give it to customers; restructuring moved the risk to the companies so they could hedge it; then Griddy got the idea to give it back to customers. So, with both gas utilities and regulated power utilities like Brazos Electric Coop, they pay whatever the market rate is for supply and then just pass it through to customers.

Govt did screw this up, and they could pay to relieve customers. But you'd just be paying from the left pocket instead of the right. Most Texans have utilities and most Texans pay taxes. You can shift how much is expected from each person, but Texans still pay for it. The rainy day fund is interesting though because we built it up with tax revenues from oil and gas, which also happens to be where most of the profits went. Maybe they could use the rainy day fund and then replenish it with more revenues from the oil & gas industry....

Should Unigas and other utilities' shareholders (or other stakeholders, since some are just municipal or cooperative) pay for it? There is this idea of the regulatory compact in which the state guarantees the distribution utility a monopoly and the utility submits to government control of their prices so they get a sufficient but not exorbitant return on capital invested (because utilities are asset-intensive businesses). In that arrangement, utilities make no money on supply and take no risk. To say after the fact, 'well you need to pay for this one,' would violate the pact, state law, and all the rulemakings that govern how utilities operate. Even if you sued them for negligence or malfeasance, they will quite rightly point out that they submitted everything they were doing to the PUCT and had it approved by the state. At this point, I think the best thing we can do is change the structure for the future so it doesn't happen again.

 

I think you are missing my point. "Privatize profit via lax regulations. Socialize cost when it bites."

In other states, Winterization is a requirement. It was not here. It wasn't that we were warned and were surprise. We were warned 2 to 3 times.

If we have to socialize cost anyway, we should definitely have regulation that try to prevent societal costs, even at the determinant of profits for these energy businesses and innovation to a certain point. As the saying go, an ounce of prevention is worth a lb of gold (in this case, $ and lives).

 

I guess it depends on what part of the value chain we're looking at. When it comes to gas service, retail is highly regulated and its costs socialized. Upstream has lighter regulation and costs and profits are not socialized. In this regard, we're really not any different from any other state. Are we far too friendly to the oil & gas E&P companies here? Yes. But good luck putting regulation on those guys.

And I really think winterization is a red herring. Power plants owned by the big corporations adopted the 2011 recommendations but had plants fail anyway. The designs are spec'ed to sustain 20 degrees for a short amount of time, so you do your best with operational vigilance, but things will freeze with a polar vortex. It's true even in the North with specs for lower temperatures (plants went down in the North in this polar vortex, and in the 2014 one as well). I wouldn't be surprised if it was the same story with wellheads. I'm sure we'll pass a bill to require winterization, everyone will feel good, the companies will continue to winterize as they have been doing, and some will fail again in the next polar vortex.

We need to recognize that equipment will fail during a national disaster and no amount of due diligence will stop it. We need a system that can keep working despite some equipment failures.

 

When parts are interdependent on each other to provide energy and particular parts of it has a huge socialize cost, a failure anywhere within the system that touches that part translates to huge cost to all of us. Simply put, we have a 'single point of failure' for massive societal cost. For that, we can't just focus on parts, but the whole. We should be ensuring, as best and reasonable as possible, that the whole stay operational.

Winterization is one issue of system-wide failure. We do know that wind turbines, gas wells, water pipes don't freeze up in the north at the temp we saw in Texas. Critical infrastructure should be protected from predictable freak events like this, not a 'last time bad' event (20 degrees for a short time). Margin is another. We have been running on thin margin (and btw, I keep thinking that thin margin might NOT be unwanted given that there is extraordinary money to be made when we run into supply issue - iow, there is not good incentive to provide good margin).

I don't trust an oversight system that has the industry effectively doing the oversight. Can we have an honest cost vs benefit analysis of freak cases that will happen more often? If someone had done that analysis back in 2011/14, I'm very doubtful that it would say the cost of greater operation resilience and margin over the 10 or so years would cost more than 200B (or whatever the final cost of this storm).

 

The latest from Unigas...

• They are spreading the cost over 60 months, not 18 months.
• Suspend the "winter weather installment fee" while the state legislature considers House Bill 1520 which reportedly spreads the costs of for all gas utility providers over 15 years and applicable to all utilities
• And of course, encouraging all customers to contact their state legislators (to support HB 1520... not to complain about the failures of the state government and the failures of Unigas).

 

We can only regulate what we can regulate. I'm thinking if realistic market cost of oil and gas can spike so much in such period of time, we need to protect ourselves from that. Diversify, greater margin, operational excellence and resiliency.

I'm all for reform at the retail side - it's stupid frankly and again, we need consumer advocate have 51% of the vote at these seats making these regulations.

 

Spreading it over 60 months will make the monthly payments average around $30 instead of $90. Much more palatable. Though I'm honestly surprised they moved at all before the securitization bill is passed. Securitization would get a lower interest than they can get and the longer term would shrink the bills more and shift some of the costs down a generation.

I agree btw on securitization as the obvious next step for this bad situation. It's been done many times and it works. It just sticks in one's craw that we shovel $10 billion to the gas industry and then chain that debt to our backs for 15 years.

We don't disagree that much on the problem. Commodity markets can spike and we need to protect ourselves from that. Diversifying our generation fuel mix would be good (curses upon the wind turbines for not weatherizing). The reserve margin in Texas has shrunk in recent years, but it's now forecasted to expand in the next few to something decent. I would add we need better coordination (plant outages for scheduled maintenance should be timed better, distribution utilities should mark gas compressors as critical infrastructure, utilities should also be able to roll blackouts by meter instead of by circuit), and some structural reforms I've already talked too long about.

But I guess the soapbox I'm on is about risk management and who wears the risk, which speaks to the issue of socializing the costs. We need to stop making consumers the patsies here. If shareholders are holding the bag, the professionals of the industry will really work to minimize the risks because they're the ones that stand to lose when the system fails. That's a conclusion that liberals are often uncomfortable with -- the best thing we can do for consumers is to hand a profit-making opportunity to corporations.

 

A fresh indignity from the world of regulated utilities. In the hardest hit states like Texas and Oklahoma, we'll probably get this securitization bill to pay our gas debts as cheaply as possible. But some states have high gas bills without them being so high that they'll securitize. Utilities are starting to ask to get recovery of those costs from customers on a longer timeline, plus the interest expense they incur for getting a loan in the meantime. But, they don't want to recover just the cost of their long-term cost of debt (something that is usually around 5 or 6% for utilities), they want to recover their weighted average cost of capital (which is their cost of debt and their cost of equity (returns to shareholders), weighted by their proportions; usually something like 7-9%). Those extra percentage points, over many years and many dollars, comes to quite a big chunk of change. And it is a subsidy, essentially, from utility customers to shareholders for something the utility supposedly has no exposure to.

 

About those wind turbines...

An updated analysis of February’s Texas power crisis by experts at the Electric Reliability Council of Texas shows that lost wind power generation was a small component of the huge losses in electric generation that plunged much of the state into darkness during the severe cold weather.

While Texas Republicans were quick to blame renewable energy during the storm — and have continued to target renewable energy for reform during this year’s legislative session — a recently updated report on the causes of generator outages during the week of Feb. 14 show that the most significant cause of the low power supply to the grid came from natural gas plants shutting down or reducing electricity production due to cold weather, equipment failures and natural gas shortages.

In ERCOT’s first preliminary report on the causes of the power crisis, released in early April, the grid operator included a chart that appeared to show power generation losses from wind as just slightly smaller than natural gas generation losses that week. But that analysis used the capacity of the state’s wind turbines to generate electricity, not what wind turbines would have actually generated if not for the outages.

Wind power feeds into the grid depending on weather conditions, and renewable energy sources typically have much higher potential to generate electricity than what is actually produced on a day-to-day basis; sometimes renewable power generates a lot and at other times none or very little. ERCOT uses detailed weather forecasts to estimate how much wind and solar power will be available to the grid.

In the updated analysis included in a Wednesday ERCOT meeting, the grid operator calculated that for the week of Feb. 14, natural gas power losses were several times that of wind generation.

more at the link: https://www.texastribune.org/2021/04/28/texas-power-outage-wind/