Texas' Biggest Power Supplier Wants to Blame the EPA for Future Blackouts
On February 2, 2011, the lights in the operating rooms of Dallas' chief trauma center flickered briefly as diesel generators began to drone. Elective surgeries — even emergency transfers from other hospitals — were halted until further notice. All nonessential operations went dark. The walk-in clinics, even certain hallways, were cut off as Parkland Memorial Hospital braced for the worst. This was triage by electricity. Texas was in the teeth of a hard freeze as arctic winds swept down through the Rockies and dropped temperatures into the teens. Parkland was running a skeleton crew, its doctors and nurses fighting a losing battle against icy streets.
Meanwhile, the grid operator whose job is to keep electricity flowing through three-quarters of the state was about to order the most sweeping rolling blackouts the state had ever seen and plunge Dallas into darkness. Despite assurances from power line company Oncor that Parkland wouldn't lose electricity, the hospital took no chances. "Our understanding was that it wouldn't affect any hospitals," Parkland trauma program and disaster management director Jorie Klein said. "We have been reassured by them that that will be taken into consideration."
Even so, the rolling blackouts found a way into Parkland's aging electrical systems. With the generators up and running, managers wouldn't realize until later that parts of the hospital had, in fact, lost power.
In the aftermath, as furious and bewildered lawmakers demanded answers — "It is unacceptable to have a system that is unprepared," scolded state Senator Kirk Watson — grid officials from the Electric Reliability Council of Texas (ERCOT) explained that the improbable had in fact occurred: One-third of the state's power plants were offline at the height of the crisis. Industry bigwigs such as the chief executive of Dallas-based Luminant, the biggest non-regulated generator of electricity in Texas, testified that frozen instrumentation had caused four of its huge coal-fired units to fail. To prevent the contagion of uncontrolled blackouts from spreading, its sister subsidiary, power transmission company Oncor, cut power to some 1.3 million North Texas customers.
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It wouldn't be the last time the grid was severely tested in 2011.
Six months later, during one of the hottest summers on record, peak electricity demand shattered previous high marks almost daily. The Texas grid toed the brink of more rolling blackouts. But while lights across Dallas went out, AC units labored under the oppressive heat and white-knuckled ERCOT managers monitored the narrowing gap between supply and demand, the political class focused its attention elsewhere — primarily on its go-to villain, the Environmental Protection Agency. The agency had just announced a set of regulations that would reduce power plant emissions of sulfur dioxide — a byproduct of burning coal that contributes to the formation of acid rain and aggravates lung and heart disease, particularly among children, the elderly and asthmatics.
The rule would fall hard on Texas, which is second only to Ohio in sulfur dioxide emissions. It would fall even harder on Luminant, whose three northeast Texas coal-fired power plants — Big Brown, Martin Lake and Monticello — pump nearly half of the Texas total into that big, blue sky. Because the plants were old and, in some cases, lacked modern pollution controls, the company faced spending billions to comply with the new rules.
The price tag, Luminant warned, would be paid in blackouts, lost jobs and high prices. Luminant CEO David Campbell claimed the company had no choice but to idle two coal-fired generating units at the Monticello plant in Titus County, shut down a couple of lignite mines and lay off 500 workers. EPA's January 1 deadline simply left it no time to retrofit its plants with pollution control devices, Luminant asserted. "We have hundreds of employees who have spent their entire professional careers at Luminant and its predecessor companies," Campbell lamented in a statement. "At every step of this process, we have tried to minimize these impacts, and it truly saddens me that we are being compelled to take the actions we've announced today."
What Campbell neglected to mention was that his company didn't have to abide by the new rule until March 2013 — then a year and a half away.
But in an anti-regulatory state, where the governor ran a presidential campaign whose central plank was dismantling the EPA, when the largest power generator yells, it's not just a congressman or a state rep who answers. It's the members of key congressional committees. It's the chairman of the state Commission on Environmental Quality. It's the Texas attorney general. It is, of course, Governor Rick Perry.
The fact that Luminant's parent company made nearly $5 million in political contributions in 2011 probably didn't hurt its case any.
From the campaign trail, Perry blasted President Barack Obama and the "job-killing" EPA. "Yet again, this administration is ignoring Texas' proven track record of cleaning our air while creating jobs, opting instead for more stifling red tape," he said. (It should be noted that almost every major population center in the state violated EPA air quality standards in 2011.) "As expected, the only results of this rule will be putting Texans out of work and creating hardships for them and their families, while putting the reliability of Texas' grid in jeopardy."
U.S. Representative Pete Olson of Sugar Land, a member of the House Subcommittee on Energy and Power, proclaimed Luminant to be "one of the latest victims of an agency that is out of control."
Texas Attorney General Greg Abbott, who many predict will succeed Perry (if he doesn't seek re-election), sued the agency to halt the rule.
While the pols were scapegoating the EPA, they ignored a plain, painful reality: Power supplies in Texas have not kept up with the state's booming population. Our deregulated market has given us higher electric rates, but it hasn't been enough for power producers to see the potential profits they need to justify building pricey new generation plants. And Luminant? During the big freeze, its parent company, Energy Future Holdings — the company that merged with TXU in 2007 through the largest leveraged buyout in history — was sweating a refinancing it hoped would extend the maturities on nearly $18 billion in debts it could not afford to pay.
When the Observer asked the business manager of the International Brotherhood of Electrical Workers Local 2337, which represents the men and women running Luminant's plants, whether cost-cutting contributed to the failure of four of its units during that winter storm, Randall Pierce replied succinctly: "Yes."
For the moment, though, Luminant had managed to whip state politicos into a fearful frenzy. And while all eyes were focused on the agency at the center of it, few were paying attention to Luminant's books, or to a system in which Texas is nearly isolated, and where blackouts could become a fact of life.
Goldman Sachs and Kohlberg Kravis Roberts, the latter the investment firm that in 1988 bought RJR Nabisco in what was at the time the largest leveraged buyout in history, lusted after TXU in 2006, and it was easy to see why.
The company's vitals were strong. At that moment, the energy market beamed beatifically on its fleet of coal-fired power plants. That's because in Texas' ERCOT region, the price of natural gas — which fires the biggest chunk of the state's power plants — sets the market price for electricity. After Hurricane Katrina ravaged Gulf Coast pipelines and pinched off supply, that price soared as if it might never stop. TXU had an army of coal-fired plants with low-fixed costs and a ready supply of lignite coal that allowed the company to produce electricity for a fraction of what it could sell it for. On paper, those plants probably looked like they could print money.
In April 2006, just a few days before Earth Day, TXU announced plans to build 11 more coal-fired plants, virtually guaranteeing that the DFW area would never comply with federal air quality standards. Environmentalists and a coalition of Texas mayors vowed to stop them. The stage was set for KKR and its buyout group to gallantly ride into Texas, playing the role of men in white hats who would rescue the state from the smoggy future TXU had in store for it. It was at the height of the mid-aughts buyout binge, and this wasn't KKR's first rodeo. Their bid to buy power companies in Oregon and Arizona had been rebuffed by state legislatures suspicious of the company's motives. This time, KKR and its partners left nothing to chance. They recruited as advisers and lobbyists heavyweights like former Dallas Mayor Ron Kirk and former U.S. Secretary of State James A. Baker III. They courted environmentalists and lawmakers, greasing the rails with nearly $20 million in political contributions.
The buyout group made clear that, if it bought TXU, the multibillion-dollar plans to build 11 coal-fired plants would be scrapped; they'd only build three. KKR, Goldman, TPG Capital and their newly formed company, Energy Future Holdings — which as yet had no assets — were hailed as heroes. The Environmental Defense Fund announced a green partnership with KKR, whose enterprise value was $410 billion and whose holdings included healthcare behemoth HCA.
KKR and Energy Future were going to usher in the new, green dawn of Texas. They were going to join the U.S. Climate Action Partnership to help enact "environmentally effective and economically sustainable climate change programs." And they were willing to pay TXU's shareholders $45 billion for the privilege of dragging the utility out of its dirty past and into the sustainable age.
Never mind that KKR's plan would involve saddling the acquired company with debt, slashing costs and flipping it for a 20-percent profit in five years — or failing that, liquidating its assets. Or that the company never had any financial incentive to bring 11 new plants online, which would only drive down the cost of electricity and its profits. Texas environmentalists, for once, had reason for optimism.
Chief Executive Officer John Wilder and other TXU management, on the other hand, clearly had doubts about the wisdom guiding their suitor's overtures. In a packet sent to investors to convince them to consent to the buyout, TXU management pointed out that the transport cost of coal had risen by as much as 100 percent.
Sure, gas prices were high now, they added, but if TXU or Energy Future wanted to break even, natural gas prices couldn't dip below $6.35 per million British Thermal Units.
At the time, TXU was the vertically integrated giant of Texas electricity — from generation to transmission to retail sales. Sooner rather than later, investors were warned, the company was going to have to split.
And then there was the astronomical sum KKR was offering. Built into that offer was a natural gas price assumption that was "higher than the future prices TXU Corp. management believed were likely, taking into account the inherently unpredictable factors that impact long-term natural gas prices," the shareholder literature read.
Broken down, KKR's bid per share was 25 percent higher than what TXU's stock was actually trading for at closing. The message from TXU management was as shrewd as it was unmistakable: There's trouble ahead in the Texas electricity market, and these guys are gonna get hosed. Take the money and run!
And boy, did they ever. Wilder walked away with a $270 million bonus. On February 26, 2007, KKR announced the merger with TXU, now rechristened Energy Future Holdings. Moody's Investors Service, a company that provides financial research on commercial and government bonds, was waiting with a bucket of cold water. It panned the deal, observing that "private equity investors do not represent natural long-term owners of the businesses and assets of TXU."
Moody's all but scolded TXU management for its fixation on the company's stock price and its heedlessness toward the actual bricks-and-mortar business. The credit rater foreshadowed trouble ahead: "While Moody's acknowledges the board's fiduciary duties to shareholders to maximize value, we also assume that the board is cognizant of the significantly increased risks of defaulting on its future debt obligations and the ramifications such an event could have on the assets and services provided by the company's businesses."
Simply put, the odds that Energy Future would fail to pay off its huge debts were better than good. If it defaulted, the fate of the company was anybody's guess.
For a short time, at least, it looked as though Energy Future might prove Moody's wrong. Analysts predicted gas prices would hover at around $8 per mmBTU through 2011.
But forces were conspiring to blow the bottom out of the gas futures market.
Geoffrey Gay was general counsel for the Cities Aggregation Power Project, a group with more than 100 member cities pooling their resources to negotiate lower, more stable bulk prices for electricity. He was getting ready to ink a deal and lock in current prices with Energy Future until he saw natural gas' downward trajectory. "If we had done that deal in '07, we'd probably be paying twice the amount today than the market price," he said. "And that wouldn't have been smart."
Between July and October 2008, prices fell by more than 50 percent. By the summer of 2009, natural gas was going for $3 per mmBTU, far below the $6.35 Energy Future needed to break even.
That year, new drilling on North Texas' Barnett Shale flooded the market with gas. Repairs to Gulf Coast infrastructure were gradually relieving the bottleneck created by the hurricane. And an economic downturn dampened consumer demand for electricity. Coupled with the increasing regulatory attention to the prodigious emissions of coal-fired power plants, it was, without a doubt, Energy Future's sweaty nightmare scenario. Back when Texas' electricity market was regulated, utilities were guaranteed a certain rate of return. But after it deregulated in 2002, the state went to an energy-only market in which generators recoup the cost of investment in new power plants only through the wholesale price of electricity. Leveraged utilities like Luminant needed the high wholesale price of electricity and the low cost of running coal-fired plants to finance a mountain of merger debt. KKR had bet big on the high price of natural gas. And it bet wrong.
As Energy Future put it in its own Securities and Exchange Commission filing, the company's "substantial leverage, resulting in part from debt incurred to finance the Merger," required it to direct a sizable portion of its shrinking revenues to principal and interest payments. Take 2011, for example. The company took in $7 billion in revenue. Then it turned around and paid $4 billion in interest. Some 60 percent of its revenue for that period went to pay the interest accruing on the merger debt. (The industry average is 6 percent, according to the Edison Electric Institute, a national association of shareholder-owned power companies.)
The effect was to "limit its ability to react to changes in the economy or the industry ..." In other words, Energy Future wasn't a nimble speedboat, poised to react to obstacles at a moment's notice. It was the Titanic. As a result, 2009 is the only year the company has logged a profit.
With wholesale power prices tanking, Energy Future wrote the value of its assets down — including the coal-fired plants that once caused KKR to salivate — by $8 billion in 2008. It announced a second write-down of $4 billion in 2010.
Its investors must have greeted each SEC filing with growing alarm. By 2009, the amount left over after adding up all the company's assets and subtracting its debts was zero. Actually, it was less than zero. It was more like negative $3.2 billion. By 2011, investors' held stock was worth negative $7.7 billion.
Energy Future worked diligently to whittle debt and extend maturities through a series of debt swaps. Debt holders were willing to take a hit on the principal amount to keep the company afloat and negotiate for better terms. Standard & Poor's characterized these exchanges as the "distressed" flailing of a company in default by another name.
But its prospects brightened in April 2011, when Energy Future gained some much needed breathing room. A robust debt market allowed the company to push back by three years nearly $18 billion in loans — the early maturing debt accounting for nearly half of its total — due by 2013 and 2014. The company paid more than a billion dollars in return and was saddled with higher interest rates, postponing what many predicted was inexorable default.
Moody's remained pessimistic. On January 30, the credit rater adjusted Energy Future's outlook from "stable" to "negative." "Absent a sustained improvement to natural gas commodity prices ... we believe [Energy Future's] liquidity will become exhausted, possibly as early as 2014." S&P gave the company the distinction of having the lowest credit rating of any utility in the country.
In February, Energy Future issued $800 million in debt so it could pay inter-company loans to a subsidiary — with an interest rate of 11.75 percent. "You're supposed to use proceeds from a bond offering to pay for a plant, emission upgrade or new power lines. For those capital expenses, which then turn into revenue," said Tom Sanzillo, a financial analyst and former acting comptroller for New York. "Not to pay dividends, or to pay off past debts. And 11.75 percent interest? They should just go find Phil on the corner down there in Austin. He might do it for 10 percent; 11.75 percent is an obscenity. There's no utility in the country that borrows for that."
As the company paid for the sins of its private-equity fathers, it couldn't seem to catch a break. Competition in the retail electricity market stripped Energy Future's retail arm, TXU Energy, of 9 percent of its customers — a loss of some $315 million in annual revenue.
Sources knowledgeable about Energy Future's generation arm, Luminant, say the company has done what any company would as it navigates treacherous financial straits: Cut costs. That could explain why plants costing billions of dollars were knocked offline during the February freeze by otherwise preventable problems with cheap fixes. "The closer they get to meeting their debt time frame, the more cutting back we see, not only in staffing levels, but other things they cut out," says Pierce, the business manager of the local electrical workers union.
"If you look at the fact that the two companies with the most serious cash flow issues [Luminant and Houston-based Calpine] had the most serious problems ... we see that in the refinery business," said David Power, deputy director of Public Citizen and former senior vice president of networks and technology at Reliant Energy. "In lots of big industries, the very first thing they do is cut preventive maintenance."
To ease its tax burden, Energy Future has contested the tax appraisals of its coal-fired power plants in several rural counties. The plants, they argue, are aging and aren't worth as much considering the low price of electricity. Rusk County Chief Appraiser Terry Decker said the county appraised the Martin Lake plant at $1.056 billion. Luminant came back with a figure just over $500 million. Decker says Rusk County has reached a settlement with Luminant for $970 million.
Titus County Chief Appraiser Randy Coppedge valued the Monticello plant at $1.021 billion. Luminant said it was worth $411 million. "It was a lot less," Coppedge said. The county is still in settlement talks with Luminant. Freestone County just reached a settlement to lower the taxable value of Big Brown by $80 million.
KKR, for its part, now values its investment in TXU at around 10 cents on the dollar.
In a letter to his shareholders, Berkshire Hathaway chief executive and investing guru Warren Buffett wrote that he'd written down the company's $2 billion investment in Energy Future by $1 billion in 2010 and $390 million last year. Betting on the TXU buyout and the high price of natural gas was a "mistake," he wrote. "A big mistake."
If natural gas prices don't rise, he warned, "we will likely face a further loss, perhaps in an amount that will virtually wipe out our current carrying value."
Far from rescuing TXU, Texas air-breathers and electricity customers, private-equity greed left the company in an impossible lurch, struggling to pay its debts and adapt to a changing regulatory landscape.
It should surprise exactly no one, then, that when the EPA tells a utility like Luminant that it needs to spend billions scrubbing the pollutants spewing from the smokestacks of old plants it says are now only worth millions, the company wouldn't just roll over.
Yet for all the indignant expressions of surprise that a state ranking as the second largest emitter of sulfur dioxide in America would be subject to a rule limiting sulfur dioxide, it's not like the industry didn't see this one coming.
In 2005, the EPA promulgated the Clean Air Interstate Rule, designed to reduce pollutants blown into downwind eastern states. Specifically, it aimed to limit nitrogen oxide and sulfur dioxide, precursors of fine particulate matter — a type of particle so fine it can travel hundreds of miles on the wind, work its way through the human lymphatic highways and wreak havoc on vulnerable pulmonary systems. By setting an emission budget and allowing the region — including Texas — to trade a finite number of pollution allowances amongst themselves, the EPA reasoned air quality would improve for downwind states.
But the U.S. Court of Appeals for the D.C. Circuit invalidated the rule in 2008 because certain states could purchase so many allowances they wouldn't have to cut their emissions at all, defeating the purpose of the Clean Air Act. The court allowed the rule to remain in place pending a stricter replacement.
That replacement arrived in 2010, when the EPA released a draft version of its new interstate pollution reg — the Cross-State Air Pollution Rule. It still included Texas, but only in a seasonal ozone reduction program. It did, however, ask utilities and the TCEQ to comment on the potential inclusion of Texas in the sulfur dioxide program.
Sure enough, when the completed version of the rule was unveiled last July, Texas was among the states that would have to further curtail sulfur dioxide emissions. For cash-strapped Luminant, whose northeast Texas plants are responsible for nearly half of the state total, it was just another problem stacked atop a mountain.
In reality, what the rule accomplished was a level playing field. Generators like Luminant, which operated plants without the additional cost of modern pollution controls, would be forced to buy allowances from utilities that invested in cleaner plants, like Xcel Energy.
Luminant responded quickly. "Without fair notice and opportunity to comment, the EPA has mandated that Texas slash its [sulfur dioxide] by half and greatly reduce [nitrogen oxide] emissions in less than five months — an unprecedented and impossible compliance timetable. These requirements would seriously jeopardize the ability of the state's electric grid to supply power to Texas businesses and consumers and threaten the loss of hundreds of high-paying jobs."
This wasn't exactly true. The deadline for demonstrating compliance wasn't until March 2013 — at that point nearly two years away. According to an EPA statement, the 2012 date was intended to make sure pollution levels didn't spike between the lapsing of one rule and the enactment of the next. And the industry had, in fact, been given an opportunity to comment back in July 2010. The writing was already on the wall.
To expect that Texas wouldn't be included in the rule, according to one knowledgeable industry source, was "wishful thinking" at best, and shortsighted at worst.
"A lot of people put pollution controls on their plants, expecting there were going to be new environmental regulations and wanted to stay ahead of the curve," said the industry source. "Other people waited."
Nevertheless, the Texas GOP establishment registered outrage.
"The implementation of this rule will result in a loss of valuable jobs in the 4th District at Luminant, the largest power generator in Texas," said U.S. Representative Ralph Hall of Rockwall, chairman of the powerful House Committee on Science, Space and Technology. "The rule will also seriously jeopardize the ability of the state's electric grid to supply power to Texas businesses and consumers, and will have damaging effects on families and local communities whose economies depend on the success of Luminant's facilities."
The chairman of the Texas Commission on Environmental Quality, Bryan Shaw, laid out a doomsday scenario: "The rule will impose great costs on coal-fired power plants, causing some to shut down or curtail operations, threatening the state's electrical capacity reserve margins needed to avoid power disruptions during times of peak demand. Such a scenario could lead to blackouts, which create serious health risks for Texans dependent on reliable energy."
But not everyone in the industry was so pessimistic. David Knox, spokesperson for Texas wholesale power generator NRG, said, "When it comes time to meet these requirements, we will be able to meet them, and the most important thing for our employees is we don't plan any plant closures or layoffs to do that."
In fact, analyses from the financial sector and ERCOT raised doubt about claims the pollution rule would imperil the Texas grid.
Financial analysts at Bernstein Research said Luminant could meet the requirements by purchasing $15 million a year in pollution allowances. That wasn't chump change, sure, but it was a drop in the bucket compared with its debt. The truth was, during times of peak demand, Luminant wasn't running its smokestack scrubbers, installed to remove sulfur dioxide. The reason was obvious: Generators make more money during peak demand, and running scrubbers reduces the amount of power the unit produces. If Luminant left its scrubbers on all the time, Bernstein calculated, it could meet the new EPA regs without idling Monticello. In fact, Luminant would receive more allowances from the EPA in part because the agency had assumed it was running its scrubbers at full capacity in its initial calculations.
But the real question was, would it make good business sense to spend as much as $500 million on a plant Luminant said was worth only $411 million? (Luminant, for its part, says it intends to spend $1.5 billion on pollution controls by 2020, accounting for other emissions rules coming down the regulatory pike.)
Said John Rowe, chairman and CEO of Exelon Corp., one of the largest utilities in the country, to an audience at an American Enterprise Institute conference: "These regulations will not kill coal. ... In fact, modeling done on the impacts of these rules shows that up to 50 percent of retirements are due to the current economics of the plant due to natural gas and coal prices."
The North American Electric Reliability Corp. estimated that the rule would force only 1 percent of the country's entire coal-fired fleet to retire.
Even so, if Luminant followed through on its threat, ERCOT concluded that the loss of the Monticello units wouldn't threaten the Texas grid.
For the moment, though, the issue is moot. On December 30, the U.S. Court of Appeals for the D.C. Circuit granted Luminant's, Texas' and other plaintiffs' requests to stay the EPA's rule, pending oral arguments in April.
Energy Future is cagey when it comes to discussing what the future holds for the company and for the Monticello power plant.
"Given that [the Cross-State Air Pollution Rule] is not currently in effect due to a court-ordered stay and in light of other environmental rules currently being issued by EPA, the near-term environmental compliance requirements for our fleet are in flux," Energy Future spokesman Allan Koenig told the Observer. "Therefore, we are still evaluating what additional investments to make going forward and on what schedule."
None of this is to say there aren't dark times ahead. But Luminant's troubles — and those of the Texas grid — have little to do with the EPA.
On February 9, 2012, just over a year since rolling blackouts darkened Texas, a few state lawmakers on the House State Affairs Committee finally began discussing the real reason why the lights may go out. As early as the summer of 2013, ERCOT predicts Texas will not have enough electricity to meet peak demand. And it's not because of EPA regs. It's because a grand experiment — one that is unique in the country — has failed. Our electric system relies not on regulators or politicians to set the daily price of power, but on the market. It's like the price of oil, pushed and pulled by a thousand different market forces, and it's not just natural gas prices on a given day.
It works like this: Imagine a stack of bids offered by the wholesale generators. They're divided into tranches by an amount of electricity at a given price. Most of the time, retail electricity providers can turn around and sell the electricity at or around the price set by natural gas to satisfy your average demand on, say, a mild spring day. When the grid gets stressed by spikes in demand during a heat wave, more electricity is available, but at higher prices. That's when utilities make most of their money, and it's this series of peaks and valleys that characterizes electric demand in Texas.
Most of the year, we don't use all that much electricity. The needs of the state are readily served by workhorse, coal-fired plants like Luminant's. But during certain times of the day (in the morning, for example, when everybody is getting ready for work) demand jumps. That's where the natural gas-fired power plants come in. They make up 60 percent of all generators in the state, and most of them serve no other purpose than to kick on during those busy hours to supplement supply. That's when wholesale prices are highest, because high demand and scarcity drive rates up into the top tier of that stack of bids. It's the only time they can compete with a cheaply run coal-fired plant. Yet when you account for their fixed costs, the mortgage on the plant and bondholders owed dividends, running a few hundred hours a year — as lucrative as $3,000 per megawatt-hour may be — is not going to be enough to tempt an energy company or a bank to take the risk of putting up the money for a new plant, especially when natural gas prices are low. But it's during the peak demand times ERCOT predicts the Texas grid will thirst for peaker plants the most.
Take into account the fact that the population of the DFW area increases, according to former Dallas Fed chief economist Michael Cox, by 160,000 a year — roughly the population of Tempe, Arizona — and you begin to see why the soundness of Texas' electricity grid may soon be compromised. Other electrical grids around the country are constellations of interconnected states. But here in the Lone Star State, we chose to go it alone. But for a handful of tie-ins, our grid is sealed off from the rest of the country.
"Bottom line for this panel," State Affairs chair Byron Cook began. "If we don't bring on more generation, you're not gonna be able to sit here and maintain the dependability of this grid in the future?"
ERCOT CEO Trip Doggett's reply was succinct and devastating in its implications: "That's correct, sir."
As he testified, Texas had just passed the 10-year anniversary of deregulation.
It was the solution to a problem Texans didn't know they had, lobbied for ardently by now-defunct, Houston-based energy and commodities company Enron. Historically, we enjoyed some of the lowest utility rates in the country under a regulated system that guaranteed generators a certain rate of return, both on profits and on the construction of new power plants.
Deregulation, we were told, would open the market up to competition, driving down prices for the ratepayer. That didn't happen. In fact, prices rose. Dallasites and Houstonians, in particular, have paid some of the highest electricity bills in the country. And when gas prices fell as the Barnett Shale glutted the market, rates paid by Texans living outside of deregulated areas fell by twice as much as those inside.
Instead of including a capacity market, which required ratepayers to bear some responsibility for making sure there is enough electricity to meet demand, proponents assured us that scarcity pricing would act as a signal, sparking free-market-driven private investment in new power plants. Its design, however, almost guaranteed that when generators were whipsawed by cheap gas, no steel would be driven into the ground. Nor did it account for the fact that scarcity pricing might send the wrong signal: Scarcity, after all, is lucrative.
The industry now says our hunger for new power plants could be sated if only the Public Utility Commission would remove the price ceiling of $3,000 per megawatt-hour and allow utility bills to soar during periods of scarcity, when blistering heat waves and blue northers send Texans scuttling to their home thermostats. But if the only way to guarantee the stability in the grid is to allow prices to soar ever higher, it begs the question: What, exactly, was the purpose of deregulation?
Look at the municipally owned and other public utilities that still operate in the state, as they do in Austin and San Antonio. At the State Affairs Committee hearing, their testimony stood in stark contrast to the dire predictions made by Doggett. "Municipal utilities are building power plants," said Texas Public Power Association head Mark Zion. "We're entering into contracts with power plant developers that enable them to obtain financing to go ahead and construct and build new power plants."
The central premise — stable customers and long-term contracts — that allowed Texas' old regulated system to prosper for years building fat reserves of electricity even during peak summer demand, was still working. Today, however, the nation's grid reliability entity says the Texas region has the lowest reserve margins.
As promised, deregulation changed the face of Texas electricity, though not for the better.
Without it, the vitals that made TXU such a tasty acquisition to LBO wizards KKR wouldn't have existed. The robust price of natural gas is what drove a market in which low-cost, workhorse base-load coal plants were an incredibly valuable commodity. Then everything changed, and suddenly they weren't anymore.
Yet the threat of grid reliability isn't Luminant's or any other private utility's problem to solve, and there's no regulatory mechanism to force them to do it. The responsibility falls on the Public Utility Commission and ERCOT. But when the state Legislature voted to deregulate the Texas market, these entities were forced to drop the reins, and the free market took them up. As TXU CEO Wilder once said, the Legislature "(does) not have a seat at the table." The free market has its own ends to look after. The problem is, electricity isn't just another commodity. It's the lifeblood on which Texas runs its hospitals, its traffic signals, its businesses. Electricity can't be stored for a hot summer day and unleashed like a strategic reserve of oil. When it's gone, the lights go out.
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