Politicians & Regulators Shrug Off Profit-Taking During Texas Blackouts

Updated below with statement from Ambit Energy

After almost a full day of testimony on the rolling blackouts of two weeks ago, we’ve heard relatively little substantive discussion about the huge run-up in electricity prices. Instead the focus – perhaps understandably – has been on what caused the sputtering of 82 power plant units and how best to avoid a similar crisis in the future.

Yesterday, two senate committees jointly heard from state regulators and representatives of the power industry. ERCOT head Trip Doggett, who’s perfecting his hat-in-hand routine, confessed that the rolling blackouts could have been prevented if power generators had take more precautions to protect their plants from the freezing weather. Luminant, for example, lost four coal-fired power plants – three of them new – because “sustained freezing and high winds” caused equipment to stop functioning, testified Luminant CEO David Campbell.

“We’re sorry that happened,” Campbell said to the senators. Luminant, he later said, lost $30 million on power purchases that day in the sky-high spot market.

While industry folks like Campbell came in for some mild scolding from legislators (Sen. Troy Fraser said the outages were “unacceptable”), more fundamental issues remained largely undiscussed. Arguably, the blackouts were yet another test of Texas’ deregulated electricity sector, probably the most “free market” one in the nation. But the politicians and regulators seemed more eager to focus on the minutiae of winterization procedures than to discuss whether the system is working for ordinary people.

Even on the issue of whether the state ought to inspect power plants to make sure they’re properly weatherized, Public Utility Commission Chairman Barry Smitherman (and author of If Jesus Were An Investment Banker) pointed to Luminant’s losses and said, “There is a sound market incentive presently in our market design so that you want to be available and running during a weather event.”

Yes, and some companies clearly took advantage of the opportunity, market manipulation or not. As I noted a while back, ERCOT raised the market cap on wholesale power from $180 per megawatt-hour in December to $2,250 on January 15th and finally to $3,000 at midnight February 1st, the day before the blackouts. That’s three times higher than the cap in most states. Twenty-nine hours later, around 5 am on February 2nd, prices in the spot market soared to the market cap and stayed at those astronomical levels intermittently for seven hours. David Power, of Public Citizen-Texas, testified yesterday that his group estimates that excess costs could run to the tune of $385 million.

Interesting timing, dontcha think?

In fact, this isn’t the first time that prices have surged after the roll-out of a new, higher price cap. A scathing report on deregulation released on Monday calls attention to a similar event in the ERCOT market two years ago. On March 1, 2008 the PUC introduced a cap of $2,250 in the spot market. Two days later, prices hit the cap. Periodically, during April and May of that year, spikes would reach and even break the $2,250 ceiling – aberrations the report said “raised more questions about competitive defects in the wholesale market.”

In contrast to all this, regulated areas outside of ERCOT don’t generally worry about price gouging. El Paso Electric, for example, is an investor-owned but regulated utility that serves parts of West Texas and southern New Mexico. The utility’s CEO, David Stevens, testified yesterday that power suppliers in that region have arranged to buy and sell power during emergencies at historical market prices.

“We didn’t see those types of price peaks that other markets may have seen,” said Stevens.

Was there market manipulation on February 2nd, 2011? The short answer is: We don’t know.  The independent market monitor employed by the PUC, Dan Jones of Potomac Economics, has opened an investigation that will likely take months. Yet lawmakers and regulators, while deferring to the market monitor, seem to be leaning towards ‘no’. “I believe he saw no indications” of manipulation, Smitherman said of the market monitor.

Later: “It appears right now that this wasn’t market manipulation” Sen. Fraser told reporters.

In any case, the market monitor has repeatedly told the PUC that he thinks prices are too low in the ERCOT market, especially during times of energy-scarcity such as rolling blackouts.

Lower wholesale electricity prices provide benefits to consumers in the short-term.However, pricing outcomes in 2009 continued to inadequately reflect market conditions during times of operating reserve scarcity. During such shortage conditions when demand for energy and operating reserves cannot be met with available resources, prices should rise sharply to reflect the value of diminished reliability as reserves are used to meet energy needs.

Higher prices, he wrote, are need to lure power plants into the marketplace.

But who will pay for the spikes?

Yesterday, Sheri Givens of the Office of Public Utility Counsel, an official consumer advocacy agency, said it was “too early to say.” However, she went on to report that consumers on fixed-rate plans will probably see little impact while those on variable-rate could very well see rate increases.

Last week, I asked William Brown, a regional sales manager for retailer electric provider Ambit Energy, whether their customers on variable rate plans would be impacted from the price spikes. He wrote back in an email:

Every electric company (REP) has a variable plan and any consumer that is stupid enough to float in one is at risk of spot pricing.  Kind of like being tied to an adjustable rate mortgage…Not a good idea if you cant afford the risk.

Of course, there are plenty of folks “stupid enough” – or broke enough – to shop for the cheapest product, despite the hidden risks. Too bad, so sad for them, I guess. And even some of those who weren’t “stupid enough” have been harmed. Last week, Abacus Energy, a small retail electric provider, went belly up after the wholesale price spikes. All 7,700 of their customers had to be manually transferred to larger companies.

Deregulation was supposed to introduce competition into a historically monopolized industry. That required inducing dozens of new small upstarts into the retail marketplace. Some of them, like Abacus, live day to day on tiny margins and are evidently ill-equipped to withstand major wholesale spikes. Interestingly, Abacus was sold to new owners in 2010 for all of $75,000 according to a confidential purchase agreement filed with the PUC. I don’t know about you but I want to buy electricity from a company that has more assets than the guy trying to sell me siding at my front door.

There may be other companies yet to tank. Yesterday, a retailer from the Valley, Alex Hinojosa Jr. of Hino Electric, told lawmakers that he had received an invoice from ERCOT for wholesale power at the rate of $7,000 per megawatt-hour.

“Somebody has to pay for these exorbitant prices,” Hinojosa said. “I just find it ironic that so many people were out [of power on Feb. 2] yet somebody is going to collect millions and millions and millions of dollars, Somebody is going to have to pay. So either retail electric providers go out of business or they pass those costs onto their customers.”

But, later, Sen. Fraser shrugged off the impacts. “The cost to consumers, we believe, will likely be small,” he said.

Update: Today, Ambit Energy co-founder Chris Chambless responded to the comments their regional sales manager made to the Observer:

I was surprised and disappointed to see the quote from one of our sales managers, William Brown espousing his opinion on the intelligence level of customers who choose variable rate plans. His is not a view shared by our company, nor is William authorized to speak on our behalf.

For the record, Ambit offers both variable and fixed-rate electricity plans, and we do our best to educate potential customers about the benefits and the risks of both types of plans. We have full confidence in their ability to understand those options and make the choice that best meets their needs.

At present, only about 15% of our customers are on a variable rate plan, and none of those customers will see a change in their rates for January or February as a result of the blowouts. Our portfolio is well-hedged, and we continue to pursue a risk-averse approach to pricing and wholesale power purchasing.