D’Andrea appeared before the House State Affairs Committee on Thursday to face legislator questions amidst the growing push to reprice electricity exchanges that occurred during February’s winter storm.
Essentially, the PUC ordered electricity prices to match the market’s scarcity after 10,000 megawatts (MW) of generation fell out of commission due to the cold weather — causing controlled, and prolonged, blackouts. According to D’Andrea, the pricing algorithm was mistaking the increased generation “bench,” or reserves available, for on-market generation, thus causing the price to stay much lower than its scarcity price.
Those prices jumped to the $9,000 per megawatt-hour (MWh) cap and remained there for 32 hours after the Electric Reliability Council (ERCOT) concluded residential controlled blackouts.
The Independent Market Monitor (IMM) — a group of economists that assesses the market and provides counsel to bureaucrats overseeing it — stated that the price should have dropped when controlled blackouts stopped as the scarcity was no longer as pervasive.
The reason it did not drop, D’Andrea stated, was that while residential blackouts ceased, industrial ones did not. Industrial consumers agree to shut down during times of emergency, but most do so with the caveat that they can sell electricity back into the market at premium prices to make up for their lost productivity.
This deal helps put power back on the market at a time it lacks supply.
The result of that prolonged inexact price, according to the IMM, was $16 billion that exchanged hands in the way it did. The PUC’s order should have ceased late in the evening on February 17, rather than lasting until the morning of February 19, the IMM argues.
On Thursday, however, that estimate was revised from $16 billion to $3.2 billion as it pertains to the electricity repricing discussion.
D’Andrea’s initial comment, the correction to $3.2 billion, is not exactly precise. The $16 billion assessment still stands, but it accounts for more than just the wholesale electricity transactions.
In all, it encompasses hedges or forward contracts, ancillary service, and electricity generation (i.e. wholesale day-ahead market) prices. But a prospective “repricing” would only apply to the lattermost, and so that fiscal note is the much lower $3.2 billion.
Gas prices also soared during the blackout, but as D’Andrea reiterated numerous times on Thursday, the PUC has zero ability to interfere in that market.
Legislators are also evaluating ancillary service transactions during the blackout, which traded above $20,000 MWh. Ancillary service is generation that is not casually deployed but lies in wait for an emergency situation. The IMM projected a $1 billion imbalance for this category.
The price imbalance there comes from ancillary service generators telling ERCOT during the winter storm they were available, paid upfront for their promised services, who then failed to produce due to gas supply problems that hit many different facets of the generation system.
Facing pressure to adjust the wholesale electricity transactions, D’Andrea emphasized to the committee that the PUC lacks the authority to reprice on its own. Should the repricing route be taken, D’Andrea is confident lawsuits will follow. He further added that if the PUC reprices, the commission will lose the legal challenge and “it won’t be close.” But if the legislature orders the repricing through legislation, then the lawsuit outcome “would be a closer decision.”
State leaders have turned on the heat, pushing for repricing measures. Governor Greg Abbott added it to his emergency item list, and Lt. Governor Dan Patrick and most of the senate have consolidated behind the idea. The Texas House, meanwhile, seems to be more divided on the question.
In a statement after the testimony, Speaker Dade Phelan (R-Beaumont) said, “[W]e now recognize more clearly the winners and losers affected by repricing. I appreciate the thoughtful questions asked by committee members and we will continue to hear testimony next week about this critical issue.”
D’Andrea stated in the testimony, “If we reprice, we’ll be picking winners and losers. It’s a zero-sum game.” He argues “zero-sum” because the money in question has already exchanged hands and any repricing would simply redistribute that amount from one hand to the other.
It’s a very complicated situation, but more simply put: generators, retailers, and every market actor in between responded in specific ways to the real-time pricing before them during the blackouts. Higher prices incentivized many to ramp up generation as much as possible to cash in on the potential windfall. That, in itself, is the very basis of the ERCOT market: generators are incentivized by prices to supply retailers and consumers with electricity.
Others, especially those who had not protected their positions through hedging or other safeguards, had to pay exorbitant prices for the dearth of electricity available.
Newton’s 3rd Law applies to more than just physics. In a market such as Texas’ energy-only system, every action has an equal and opposite reaction. That holds true for capacity markets, too, but especially so for a system that pays post-service rather than negotiating upfront.
Repricing, in effect, would be the state relitigating not only past prices, but past decisions long after the time they were made. The ripple effects, D’Andrea emphasized, are impossible to know ahead of time.
If after a consumer purchased a television, a regulatory body stepped in to retroactively hike the price and mandate the consumer fork over that difference to Best Buy, that would be considered underhanded. Effectively, that is what many in the market feel would happen if repricing is enacted.
The caveat, however, is that at the time of the PUC’s original order, electricity prices were hovering in the low thousands. Now, due to the compounding generation problems, it may have ballooned to the $9,000 MWh cap regardless. But Texans will never know because that is not what occurred and market decisions stemmed from that, too.
Asked if the estimated overcharges were a result of an error, D’Andrea stated, “It’s not a mistake. It’s a formula that we were all surprised by, but we all agreed to beforehand.”
“The system needs to be changed,” he stipulated.
Rep. Chris Paddie (R-Marshall), State Affairs Committee chair, indicated his concerns with “changing the rules of the game after the game is over.”
Meanwhile, Rep. Richard Peña Raymond (D-Laredo) found the repricing appeals persuasive. “If the governor, lt. governor, and most of the senate are for this, maybe the governor needs to appoint someone to the PUC who will carry it out,” he told D’Andrea.
The PUC has repriced before, but only when the error in question occurred at the hands of the grid controller, ERCOT.
D’Andrea maintained that ERCOT did nothing wrong, further stipulating, “ERCOT did many things wrong but not here.”
Winners and losers of the situation exist all over the industry. The state’s largest electric power cooperative, Brazos Electric Power Cooperative, filed for bankruptcy due to an unpayable $1.8 billion bill from ERCOT.
“If we reprice, you could help more co-ops,” D’Andrea said of the prospect.
While Brazos would stand to benefit having the prices relitigated, the South Texas Electric Cooperative (STEC) remains staunchly opposed.
“[T] these are retroactive policy changes that would further destabilize the ERCOT market, cause investment to flee the market, harm market participants that relied upon existing market rules to manage financial risk and impede ERCOT’s ability to maintain the reliability of the electric grid,” STEC said in a filing to the PUC.
Meanwhile, one of the largest generators in the state, Vistra Corp. hopes the PUC reprices both the day-ahead and the ancillary service transactions.
“[P]rices should be at their highest while ERCOT is ordering load shedding and should not be after ERCOT had ceased ordering load shedding,” Vistra stated in a public comment.
NRG Energy, whose CEO testified along Vistra’s in the first hearings, is against repricing, saying to the PUC, “[It] would cause long-term harm to consumers and incur unknown costs that could exceed any perceived benefits.”
In an unusual move, Lt. Governor Dan Patrick joined the Senate Committee on Jurisprudence to press D’Andrea further on repricing.
“I don’t call this ‘repricing,’ by the way. I call this correcting a mistake and doing the right thing,” Patrick told D’Andrea.
About the pricing order, Patrick asked, “Why didn’t you let the market be the market, instead of pushing the price to $9,000 [MWh]?”
“Because the market was killing people in their homes … that’s why,” D’Andrea added, further stating, “Every decision we made was to get the lights on.”
The repricing issue in front of legislators presents a puzzle, wrapped in a conundrum, inside an enigma as companies on both sides await with bated breath and litigation in hand.