$9,000 per MWh, disputes over governance and invoices, possible bankruptcies: Texas looks at the structure of its wholesale electricity market

Winter Storm Uri and the weather disaster it brought to Texas in February 2021 drove electricity prices to $9,000 per megawatt hour in the state’s wholesale electricity market. Certain Texas consumers and energy retailers have suddenly found themselves faced with dramatic increases to their electricity bills; several energy retailers have defaulted on their payments to generators, which has already led to bankruptcy petitions. These developments are bringing the state’s deregulated electricity market under scrutiny.

Texas legislative response

In recent days, several emergency bills have been introduced in the Texas Legislature proposing to amend various aspects of the organization that manages the flow of electric power to more than 26 million Texas customers – the Electric Reliability Council of Texas (ERCOT). The Texas Public Utilities Commission (PUC), which oversees Texas’ competitive wholesale electricity market, has also been featured in the proposed legislation.

While these recent emergency bills aim to avert similar outcomes in future, by proposing to change matters such as how the ERCOT board members are appointed and whether to make ERCOT accountable to other entities, pressure on Texas lawmakers to quickly address the problem remains.

On March 15, 2021, for example, the Senate approved a bill directing the PUC to order ERCOT to correct “prices of wholesale power and ancillary services sold in the ERCOT market” during the period beginning 11:55 PM on February 17, 2021 and ending 9:00 AM on February 19, 2021. The bill proposes that the corrected price of wholesale power and ancillary services should reflect the price that “would have been paid in the ERCOT market during that period absent any action…to raise prices.” The State Affairs Committee of the Texas House of Representatives heard invited testimony “on the correction of any billing errors by ERCOT” on Tuesday, March 16, 2021. 

PUC responds

The PUC has responded in a number of ways to the winter weather event. Two notable efforts are the PUC’s eight areas of focus and its order directing ERCOT to extend certain customer’s invoice disputes.

On March 12, a memo from the PUC outlined eight key areas of focus guiding the Commission’s actions. These areas include a review of communication standards and expectations among utilities, ERCOT, the PUC, and the public, as well as potential improvements to the ERCOT governance structure, bylaws, and stakeholder process.

On March 12, the PUC also passed an order directing ERCOT to extend deadlines and grant exceptions to certain provisions of the ERCOT Nodal Protocols. As a result, those who want to question electricity charges have six months to dispute their invoice, rather than ten business days. The order notes that the widespread and ongoing disruptions in the ERCOT market justify such extensions. This six-month deadline, the order suggests, will allow market participants adequate time “in light of current market conditions to review invoices and settlement statements or resettlement statements.”

PUC vetoes request to reprice power charges

In early March, Governor Greg Abbott and Lieutenant Governor Dan Patrick as well as 31 of 35 Texas state senators called for the power charges in the critical period to be repriced. But on March 5, 2021, the PUC vetoed a request from the Texas independent market monitor to reprice state power charges from the period of February 18 to February 19. Analysts comment that as a result, $16 billion in costs are being passed on to electric providers. The PUC also put on hold a decision on whether to reprice ancillary services.

PUC Chairman Arthur D’Andrea explained that decisions on energy pricing during Winter Storm Uri were made in real time based on information available to all market participants, adding that these participants responded in ways they would not under different circumstances. D’Andrea also stated that the results of repricing are unknowable. He said market participants “did all sorts of things they wouldn't have done if the prices were different, and it's nearly impossible to unscramble this sort of egg.” Mr. D'Andrea was appointed PUC chairman by Governor Greg Abbott after the March 1 resignation of former chair DeAnn Walker; he is also the “last man standing” – the sole remaining PUC commissioner, after the resignations of Walker and the third PUC commissioner.

The PUC’s decision reflects its determination to avoid interfering with commodity markets.

How did we get here?

Even with PUC’s order extending deadlines to contest ERCOT invoices, questions remain about how prices reached this peak and what may be done to prevent similar charges in the future.

It is being argued by many observers that electricity prices reached these levels because of the structure of Texas’ wholesale electricity market. One of the largest market participants in Texas is ERCOT, which manages the flow of electric power to 26 million Texas customers. This equates to ERCOT managing approximately 90 percent of the state’s electric load. The PUC’s regulatory role includes overseeing the state’s competitive electric wholesale market. This includes overseeing ERCOT’s compliance with Texas utility laws and the prices paid for in the ERCOT market for wholesale electricity. Accordingly, PUC and ERCOT are the two key organizations responsible for operating the Texas electric grid, with the PUC possessing ultimate authority on whether to approve or correct the clearing prices of energy and other ancillary services paid for in the ERCOT market.

During the historically sub-freezing days in mid-February, the PUC exercised this authority to direct ERCOT to ensure that prices for wholesale electricity reflected what it described as the “scarcity of supply.” As the PUC’s February 15, 2021, order explained: “If customer load is being shed, scarcity is at its maximum, and the market price for the energy needed to serve that load should also be at its highest.” The highest energy prices could reach under Texas law is $9,000 per MWh, and prices reached this cap.^[1]

Wholesale buyers that failed to purchase power in advance to hedge their exposure to higher prices and generators that could not generate the power they committed to provide were forced to purchase power at the offer cap of $9,000 per MWh. Accordingly, market conditions and the structure of the Texas wholesale power market created circumstances in which market cap prices could be charged. The PUC’s decision not to reprice power charges could mean ERCOT invoices may be enforceable.

Energy retailers remain liable for their power purchases

The PUC’s March 12 order discussed above gives invoice recipients additional time to file a dispute or an exception to an invoice, settlement statement, or resettlement statement related to ERCOT operating days February 14 – 19, 2021. However, as things currently stand, energy retailers remain liable for their power purchases, although the prices of some purchases may be corrected for a period of this time pending passage of the Senate bill discussed above. Also as mentioned above, some energy retailers have defaulted on their payments to generators, which has already led to bankruptcy petitions and lost customer bases. Conversely, retailers who recently put in place costly system upgrades – and who thus remained fully operational throughout the storm – are concerned that repricing would punish them for having modernized.

We will continue to monitor how issues from this historic event are addressed by the Texas Legislature, PUC and ERCOT. For additional reading on the commercial consequences of the extreme weather conditions, please see our article discussing the relationship between weather and force majeure.