by Wendell Bell, Grid Monitor
Posted 03/17/2021

On Tuesday morning, the House State Affairs Committee held another hearing to explore the possibility of repricing wholesale electric prices in the Electric Reliability Council of Texas (ERCOT) during Winter Storm Uri, a matter Gov. Abbott recently designated an emergency item for the legislature. Committee Chairman Chris Paddie, R-Marshall, said he aims to “shed light on the realities and possible implications and the unknowns related to repricing the electricity market after the fact.”

The committee was well aware that on Monday the Senate had convened a day earlier than scheduled, suspended all necessary rules, and passed SB 2142 requiring the Public Utility Commission (PUC) to direct ERCOT “to correct the prices of wholesale power and ancillary services” during a 32-hour period when wholesale prices were kept at the market cap price of $9,000/MWh through an administrative decision.  During Tuesday’s hearing, Paddie made it clear that he and many others in the House prefer a more deliberate approach to the issue, having several concerns about the practicalities of repricing markets retroactively, unforeseen consequences, and whether or not repricing would result in any relief for end-use consumers.

The committee heard invited testimony from three invited witnesses: Carrie Bivins of Potomac Economics, which serves as the Independent Market Monitor for ERCOT; Bill Magness, CEO of ERCOT; Arthur D’Andrea, Chairman of the PUC; and Chris Edmunds, Global Head of Clearing and Risk at Intercontinental Exchange (ICE).  Bivins recommends that ERCOT reprice certain wholesale market prices during a two-day period, while the other three advise against it.

Bivins said that Potomac Economics stands by its recommendations to resettle wholesale power markets.  “Economically efficient market prices must reflect actual supply and actual demand and departing from this fundamental principle erodes the integrity of the market,” said Bivins.  Her analysis shows that the decision to extend the pricing intervention resulted in overpriced energy in ERCOT’s real-time energy market by $16 billion.  However, the amount of money that would change hands on a net basis at the corporate level in a resettlement is estimated at $4.2 billion. Potomac also recommends that ancillary services be capped at $9,000/MWh for hours when the price exceeded that, because nothing in the rules expressly endorses the idea that prices of operating reserves would exceed energy prices during a shortage.  The net effects of resettling ancillary services are estimated at $900 million.

When asked by Rep Phil King, R-Weatherford, what price should be used to resettle markets, Bivins replied that there are many components that ERCOT would have to adjust.  King inquired about using an existing reliability unit commitment (RUC) process used to make generators whole for actual costs of running units that would otherwise be taken out of service.  Bivins indicated that the RUC process would not necessarily fit this situation and might still result in high prices.

Rep. Donna Howard, D-Austin, asked about the role of extraordinarily high gas prices in setting the pricing for electricity during this period and whether there was any “regulatory breaker” for that.  Bivins agreed that there are no provisions for capping gas prices, but those high prices act as an incentive for generators. 

Rep. Todd Hunter, R-Corpus Christi, said that the “bottom line” is that consumers pay and that correcting pricing errors would not result in returning money to consumers.  Bivins stated that her analysis focused on the wholesale market and that she did not have expertise in retail markets.

Rep. Eddie Lucio III, D-Brownsville, said that public power entities like Brownsville Public Utilities Board and Magic Valley Electric Cooperative serve load as well as generate power.  While they received money on the generating side, they were also paying for power on the load side.  While it appears they made a profit on one side of the ledger, they still have high bills to pay on the other side of the ledger.  Bivins said that how that “nets out” would depend on how they were hedged.  She suggested that some public power entities were net sellers during this event, partly due to load shed requirements.  “Yes,” said Lucio, “but they had to buy gas.”  He noted that public power providers have to pass costs on to consumers “because there is no one in the middle.”

Rep. Richard Raymond, D-Laredo, said that the focus is on the $16 billion racked up during a 32-hour period is too narrow because Potomac’s estimate of energy costs during the whole event was $46 billion.  Raymond said he was “sort of with the Senate” in trying to correct at least part of the overcharges.  He said it appeared that even that effort would “let them keep the $30 billion.”

Rep. John Smithee, R-Amarillo, asked if the PUC had ever ordered a repricing and Bivins said, “No.”  Smithee then asked that if ordering the PUC to do it now would cause concern for Texas markets, “that whatever deal we make could be undone by the legislature.”  Bivins acknowledge that markets other than those for electricity could be affected.  She said that reasonable people could disagree and that she could not opine on “downstream” effects on other markets.

Chairman Paddie asked whether the PUC order to keep prices at the market cap was really a “reliability instruction” to keep the grid safe.  Bivins said she understood the reliability concerns but that the decision was at odds with efficient markets and outside the PUC’s written order.  Paddie asked if she could definitively say that not keeping the price at the cap could have plunged the system back into a crisis.  Bivins replied said she believed that there was room for load to come back on and that reserves were building during the period in question.

Paddie also explored issues of fairness, questioning whether it was reasonable to retroactively take money from some to give to others.  Bivins said “people who were paid too much would have less.”  Also, she did not make recommendations regarding winners and losers but focused on the economic analysis of the market.

ERCOT CEO Bill Magness gave a brief recap of actions taken during the winter event.  He reaffirmed his position that keeping prices at the cap for an extend period was not “an error” but rather a decision made to keep the lights on.  While it appeared that grid conditions were improving, there were serious concerns that ERCOT’s forecasts indicated that it could fall back into mandatory load shed.   He reiterated that the number one priority was to avoid that.

Magness explained that a major factor regarding the pricing decision was that ERCOT could not know what would happen to the voluntary load shed decisions made by large industrial customers.  Those sophisticated power users rely on price signals, so ERCOT needed to send the strongest signal possible to keep them off.  The administrative decision made in consultation with the PUC was dealing with an emergency situation calling for extraordinary measures. The PUC’s order directing ERCOT to set prices at the market cap allowed ERCOT to hold it there as long as there was any kinds of load shed, even after an expiration date referred to in that order. 

Rep. Todd Hunter, R-Corpus Christi, asked, “Now that we have heard your defense, tell us your suggestions for laws, policies.”  Magness replied that, while he would defer policy decisions to others, he suggested three areas that should be explored.  First, an enhanced statewide emergency alert system such as found in legislation scheduled for hearing later in the week.  Second, explore ways of getting better information about generator readiness including fuel supply.  Finally, develop better tools for transmission and distribution utilities to execute load shed programs in a more granular fashion.

Rep. Phil King, R-Weatherford, noted that there seems to be two issues: what happened and how/whether to reprice.  He asked Magness if ERCOT were ordered to reprice, how would it be funded?  Magness replied that ERCOT does not have a mechanism, adding, “I am not a banker.”

Paddie asked for clarification of the distinction between an error and a management call.  Magness replied that, under ERCOT Protocols, there were very limited provisions for price corrections, mostly tied to data inputs or hardware/software malfunctions.  There were no such errors during the winter event according to Magness.

Paddie asked if the legislature ordered repricing, how could it be done?  Magness said that ERCOT could issue new invoices, but didn’t know they whether could be paid.    When invoices are not fully paid, ERCOT eventually collects the money through uplift charges to the whole market.  It is clear that repricing would benefit net buyers and hurt net sellers.  However, Magness said it is difficult to predict how repricing might affect consumers.

King asked about the current level of “shortpay” for the event.  Magness replied that it was around $3 billion.

ICE spokesperson Chris Edmunds said that the emergency action by the PUC and ERCOT were rational and irreversible.  He said that ICE markets, which handle many of the ERCOT market hedging transactions, were settled on March 5th.  Further, ICE will not reprice any other those transactions retroactively because doing so would erode confidence and cause “an amount of unintended consequences.” 

Edmunds explained that resettling transactions would violate rules of the Commodities Future Trading Commission (CFTC).  Also, doing so so would lead to immediate lawsuits from market participants.