Finally, a little light at the end of the tunnel in Texas

 

Yesterday, I wrote this post about the continuing financial mess in Texas; it was based on an article yesterday in UtilityDive. The post described how the Lieutenant Governor has done a 180-degree shift and now is trying to get refunds for everyone who was overcharged due to the high prices for power during the week of Valentine’s Day. That’s a great idea – but the only problem is it’s illegal, period. My post ended with the implication that there will be no end to the uncertainty in the near future, and perhaps for years.

However, I realized early this morning (when most of my posts get written, at least mentally) there was another article yesterday that pointed to what isn’t a solution to the whole problem, but may be a solution to part of it (at least $3 billion, maybe more, of the entire $29 billion potentially overcharged. Hey, it’s a start, anyway). Of course, it’s not a solution that the people of Texas will like, since it will require them to pay most or all of it – either as taxpayers or ratepayers. But guess what, folks? You’re going to pay most or all of the entire amount of overcharges anyway. This way, at least you’ll know how much you may end up paying for the $3 billion (and possibly higher) reduction in the magnitude of the problem.

That article was in the Wall Street Journal, and discussed two news events:

·        ERCOT is in talks with Goldman Sachs to tide them over a $3 billion shortfall in power payments. They need this because some distributors of power aren’t paying ERCOT for it (ERCOT, besides managing the grid in Texas, serves as a clearing house for wholesale power payments. The power distributors pay ERCOT for the power they buy from generators, and ERCOT pays that to the generators).

·        Normally, unpaid bills are paid by all of the other participants on the grid, as dictated by ERCOT’s charter. However, a number of power buyers are disputing the charges (or have declared bankruptcy, as in a couple cases, with more certain to come), and it’s unlikely ERCOT will be paid in full soon, if ever. This leads to the second event:

·        CPS Energy, the huge municipal utility that serves San Antonio and surrounding areas, sued ERCOT last week, saying they shouldn’t have to pay for other participants’ shortfalls. They said the “extreme confiscatory prices have caused many providers within the Ercot system to become insolvent.” The municipal utility for the city of Denton has filed a similar suit.

CPS is both a power generator and a power distributor (probably most large municipal and cooperative utilities in Texas, as well as in many other states, are similar). In fact, CPS is a very large generator. Yet CPS “ran up $1.1 billion in costs buying electricity and natural gas last month”, according to the lawsuit.

Why did CPS have to spend so much money buying power, when they generate so much of it themselves? That’s simple: because they don’t generate enough to serve their whole service area, and because the fact that most Texans use electricity to heat their homes meant that demand skyrocketed during the extremely cold (for Texas) weather during Valentine’s Day week.

But here’s a more interesting question: Didn’t CPS make a lot of money on the power they generated that week? If so, the fact that their costs went up so much would almost certainly have been offset by the amount they received for selling their power – in fact, their receipts from selling power should have been some huge multiple of the costs they incurred buying it. Why are they trying to kill the goose that laid the golden egg that’s enriching them?

Here’s where municipal and cooperative utilities differ from the investor-owned power generators in Texas: They’re owned by their customers. A cooperative is literally owned by the consumers that it serves. A municipal utility is technically owned by the municipality it serves, but since the mayor and other elected officials of the municipality owe their positions to their voters, municipal utilities are effectively “owned” by their consumers as well, since they can all vote if they want to.

Given this, it’s just about certain that municipal and cooperative utilities didn’t pass on to their consumers anywhere near the full cost of the power they had to buy during the crisis – if they passed on any of the costs at all. This is certainly why Brazos Electric Cooperative – the largest coop utility in Texas – filed for bankruptcy two weeks ago. And the article points to a couple other munis or big coops that will likely have to file, if there’s no relief from the bills they owe.

Note that CPS doesn’t seem to be asking for relief from costs they incurred for power they purchased. Rather, they’re asking for relief from ERCOT’s practice of spreading costs of payment defaults across all ERCOT grid participants (note that this isn’t synonymous with “Texas power market participants”, since the far eastern and western parts of Texas are on different grids, and not part of ERCOT’s grid. Those areas aren’t part of this mess, but that doesn’t mean they won’t end up paying part of the costs in the end, since they do – as far as I know – pay taxes to Texas).

Here’s why I believe the CPS lawsuit points to at least a partial solution to the $29 billion payments problem in Texas:

1.      If CPS is in fact willing to absorb the $1.1 billion in costs they directly incurred during the crisis, this means those costs will be paid by their “owners” – the ratepayers of CPS’ service area (although the costs won’t be billed in one bill, as is the case with customers of investor-owned power providers. If they spread this over say ten years and get financing during that period, it may well be fairly manageable).

2.      Note that CPS’s take on this is different from Brazos’ take, since the latter has filed for bankruptcy – meaning they see no easy way to pass all of their costs on to their consumers over a reasonable period of time. But it seems that at least some of the municipals and coops will be able to weather this storm, although their ratepayers/owners/voters aren’t going to jump for joy at the prospect of sharply increased bills over a long period. This reduces the amount of the ultimate shortfall in payments, although how much is uncertain at best.

However, it’s clear to me that ERCOT might as well give up trying to collect the $3.1 billion payments shortfall from the grid participants. They’ll presumably get the loan from Goldman Sachs, and they’ll have to pay it back either by surcharging power sales for say the next ten years, or by asking the state to sell bonds to make them whole. And guess who will ultimately have to pay off those bonds? Why, the good citizens of Texas will. Who else did you think will?

In fact, my guess is the citizens of Texas will ultimately pay a good deal more than $3.1 billion for the very expensive week in February, and the poorly designed market system that led to it.

Any opinions expressed in this blog post are strictly mine and are not necessarily shared by any of the clients of Tom Alrich LLC. If you would like to comment on what you have read here, I would love to hear from you. Please email me at tom@tomalrich.com.