Governor Greg Abbott’s eyes were glued to the list of talking points before him during a press conference Tuesday. He had just signed into law two bills meant to ensure that the state’s grid would never again collapse, as it had in February when blackouts left millions of Texans without heat or power and killed an estimated seven hundred. Despite the criticism by many former industry experts and Democrats, Abbott said the legislation would “fix all the flaws” that led to the blackouts and that “everything that needed to be done was done to fix the power grid in Texas.”
Senate Bill 2 reorganizes the governance of the Electric Reliability Council of Texas, ERCOT, the state’s main grid operator, a third of whose board members lived out of state at the time of the blackouts. Senate Bill 3 requires the Public Utility Commission and the Railroad Commission, which oversee the electric and natural gas industries, respectively, to establish rules for the weatherization of power plants, transmission lines, and gas facilities deemed critical to the electricity supply chain. Both commissions are tasked with inspecting facilities and can levy fines as large as $1 million to those that don’t comply with weatherization rules within an unspecified “reasonable period of time.” The legislation also requires natural gas facilities along the electricity supply chain to register as “critical infrastructure” so their electricity is kept on during blackouts.
Lawmakers also passed four “securitization” bills. Securitization is admittedly a bit of a wonky topic, but it’s the primary financial tool by which lawmakers are managing the $10 to $16 billion in costs incurred by utilities and suppliers during the blackouts. Recall that the Public Utility Commission, overseen by Abbott’s appointees, forced wholesale power prices to remain at maximum levels for 32 hours longer than an independent market monitor determined was necessary. While some gas suppliers, banks, investors, and power generators collectively made billions of dollars by selling energy when prices skyrocketed during the storm, other parties, such as city-owned utility CPS Energy, in San Antonio, bought energy during the surge in prices and now owe debts they are unable to pay. Securitization allows companies that took losses during the blackouts to cover those losses by incurring debt through bonds backed by the state. The catch is that ratepayers—that’s you and me—are ultimately responsible for covering the loans, including interest, through extra charges on our bills. Some call it a blackout bailout.
The reforms that Abbott signed into law were significantly narrower than the whole portfolio of legislation the Lege had considered. Shortly after the grid failure, lawmakers had proposed building more backup power plants and considered whether to require all natural-gas facilities to weatherize (many facilities do in neighboring states that were slammed by the same storm that hit Texas in February but suffered few, if any, blackouts). Lawmakers had also mulled whether Texas should join national or interstate grids, or shift to a capacity market, whereby generators would be paid to keep power plants on standby, rather than the current system in which they get paid only for power they generate. Some legislators had focused on “demand response”—measures to curb demand during peak power consumption, such as requiring that new buildings be more energy-efficient or that all homes be winterized.
Not everyone shared Abbott’s conviction that the bills that did pass were comprehensive enough to prevent future grid failure, including the man who had carried SB 2 and SB 3 through the House, Chris Paddie, chairman of the House State Affairs Committee. “There’s more to be done,” Paddie said at the Tuesday bill signing. Other experts agree. Last week, five former Public Utility Commission commissioners made twenty recommendations for actions that go beyond what the Legislature did this year—including requiring weatherization of a larger pool of natural gas plants and requiring new buildings to be more energy-efficient. Other critics include Democrats who unsuccessfully tried to increase fines for poor compliance and require that facilities weatherize within six months of the PUC and RRC approving standards.
Then, on Monday, ERCOT asked Texans to voluntarily conserve energy when electricity demand threatened again to outpace supply because of unexpected plant outages that caught regulators flat-footed.
Texas Monthly spoke with four experts from across the energy and electric industries to make sense of what the bills do and whether they will go far enough to prevent future blackouts. The interviews have been lightly edited for clarity.
Texas Monthly: Will SB 3 prevent future blackouts?
Curt Morgan, CEO of Vistra, the state’s largest electric retailer: I think it will. I can’t say that we couldn’t have future blackouts, but they would be more what I’d call economically driven, meaning demand for power would just be extraordinarily high and it would be probably more related to the intermittent resources—wind, in particular—not being able to supply enough power [as opposed to cold-weather-related outages or those that occurred because natural gas facilities weren’t listed as critical infrastructure and lost the power needed to operate].
The way that the gas and the electric systems work together and the difference in oversight and regulation between the two had created a situation where there’s a perverse incentive for some players in the natural gas business to profit from the dysfunction of their own system [such as Jerry Jones’s company Comstock Resources, which sold gas when prices were high]. That happened in a big way during Winter Storm Uri. They made billions of dollars while the electric sector lost billions of dollars. It was one of the greatest transfers of wealth that I’ve ever seen. And the thing that’s perverse about it is that their system did not work. It did not fully function. Their people did not follow through on registering their critical infrastructure. They had freeze-ups. Not to say that the electric sector didn’t either, but the electric sector took a big hit for their inability to function as well as they should have. The gas system actually profited and profited in a big way from the dysfunction of their system. If that didn’t get fixed, then we would have problems long-term. That’s what I think SB 3 gets to the heart of and why the oil and gas lobby in the state of Texas fought so hard against it, because at the end of the day it puts responsibilities on them to perform.
Charles Blanchard, the head of natural gas research at the commodities trading firm Mercuria Energy America and author of The Extraction State: A History of Natural Gas in America: I don’t think that it will prevent blackouts, but I think that it will greatly reduce the impact of them. If electric companies hadn’t cut power to the upstream and midstream industry—mostly gas processing plants, and then also electric compression that moves gas through pipelines—you might have not lost ten or fifteen gigawatts of power. [At the peak of the blackouts, forty-six gigawatts were offline.] That would have been huge.
Jim Boyle, a consumer advocate and former head of the Office of Public Utility Counsel of Texas: I don’t want to be totally negative about it. A lot of folks are positive. It really helps communication between the agencies, particularly the Public Utility Commission and the Railroad Commission. Mapping critical infrastructure is very important. The effort to try to get load sheds [controlled power outages] that are not sustained outages is important. Utilities need to be more precise about critical customers that need to be on board without taking on a lot more customers than are necessary. There are a lot of positives that were in SB 3, without a doubt. On the other hand, there are a lot of things that are missing from SB 3.
TM: Where do the bills fall short?
Boyle: The legislation does not provide any target for what winterization or weatherization means, leaving it up to the agencies like the Railroad Commission in Texas to define. There’s so much influence by the oil and gas industry on the commission, I worry about what kind of rules will come out of the RRC. That’s of concern. Nothing was done to figure out how we get the electricity reserves that are necessary to meet the requirements of an extreme weather event.
We also would have hoped there would have been something said about new gas wells. At a minimum, new wells ought to be winterized and there are about ten thousand wells out there that played an important part [in the failure of the grid], as admitted by the industry itself. They ought to be winterized. There’s no reason to delay. I think the real sad thing is, can we rely on the Railroad Commission to do right in the rules and getting winterization in place? The answer is we can’t.
I think we should have joined with the rest of the United States and gone with interconnections to the Western Interconnect [the grid shared by fourteen states, two Canadian provinces, and a sliver of Mexico] and the Eastern Interconnect [shared by every state east of the Rockies except Texas]. These power grids can help us when we need it. I would have liked to see more about demand response, potentially from commercial customers and perhaps more industrial customers. I would have liked to have seen more discussion about relooking at the PUC and the Railroad Commission, particularly when the Railroad Commission plays such an imperial role out here. It’s hard to have accountability when you have an agency that represents itself to most people as regulating railroads.
Blanchard: Probably the best thing to do is to create a capacity market with real penalties for not generating. It still wouldn’t have gotten us one hundred percent out of the woods. But a capacity market with really, really strong penalties would, first of all, have caused the plants themselves to winterize. It would probably also cause, through a back channel, an invisible-hand-type mechanism for producers and processors to winterize their facilities.
The bill was also pretty vague. What do I like as a nitty-gritty guy? I like something like, “all generators twenty-five megawatts and over shall have the ability to run natural gas to an ambient temperature of minus fifteen degrees Fahrenheit.” That’s a rule. This bill is the “let’s plan the plan” kind of thing.
At power plants, weatherizing makes sense because they’re big, and while there’s a lot of them, there’s not that many compared to wells. Winterization, as it relates to gas facilities, I’m more circumspect on. With power plants, at least you could write a rule like all power plants must do this and that. You can’t possibly do that for gas wells because there’s so many more wells. It’s a bit more onerous just in terms of costs. I think at a lot of wells, people just wouldn’t do it [and would instead shut down the wells].
A power plant is rated for capacity and that capacity number is tracked by ERCOT. So the power plant advertises it can do a gigawatt. If it doesn’t do a gigawatt, then something has gone wrong. A gas well can’t advertise that, because if it was producing one hundred million cubic feet yesterday, it might produce ninety-four million cubic feet today—nothing to do with weather, just fluctuations. It’s geology. There’s no way you can go and say you didn’t meet your stated capacity because there never existed a capacity of a gas well.
Suzanne Bertin, managing director of the Texas Advanced Energy Business Alliance, which advocates for renewable energies: We had an opportunity to really do more to address the demand side of the equation. There were some bills that were proposed that would have deepened the state’s goal for energy efficiency. I think that’s a lost opportunity for the state. The thing that stands out to me about the winter storm is the fact that the amount of demand on the electricity system during that winter storm was really about the same as what we would see on our notoriously hot summer afternoons, and so it’s pretty clear that no one was expecting that level of demand on the system during winter.
If we had done more ahead of time to ensure that folks had invested in energy efficiency and winterizing homes, that sort of thing would have created less demand on the system, which would have made it less taxing for generation companies to be able to keep up with.
TM: Should the Legislature address energy issues in a special session? If so, what do they need to do?
Morgan: The things that we felt like we needed to get done happened in some form or fashion. I really don’t have something else that I feel needs to be picked up in a special session. There’s still some work to be done by the Public Utility Commission reviewing the amount of reserves that we have. Do we have the right balanced set of assets? That’s unfinished business, but there’s a process to do it. I was glad that they didn’t try to solve that kind of an issue inside the Legislature. It’s too complicated.
Bertin: I would say no, that I don’t think we need to have another special session right now. Frankly, I think we need to have some time to allow the commission to implement the provisions that they’ve been given. Of course, heading into the summer, folks need to be focused on actually operating the electricity grid. That’s where the primary focus should be on these companies, is really making sure that they’re there and available to run through the summer, providing reliable service to customers.
We’re going to have some time to take a look at the broader market-design issues. The Legislature in SB 3 did create this committee that is going to be looking at a state energy plan over the next year and a half or so. Then we have the normal interim legislative process where the lieutenant governor and the Speaker can issue interim charges to jurisdictional committees to continue investigating issues and get things teed up for potential modifications in 2023. I would say probably wait and make adjustments in 2023.
Boyle: There’s going to be a special session and the question is whether any of the energy items should be in there, and they should. The Legislature should have done something with the reserves, that is, having enough quick-start plants that are available on a rapid basis in an emergency. I also don’t think we finished at natural gas facilities, particularly at the wellhead.
The other item that needs to be addressed is something that didn’t get attention during the session, and that is we need to join fully with the other grids out there and there’s just no excuse for not doing so. They can make us much more reliable and can really make renewables work all the time by getting wind or solar from other states when our facilities are not operating at full capacity. The benefits are tremendous and we need to get on to do it.
TM: As a result of the securitization bills, Texans will have higher electricity bills, potentially for years, to bail out some of the state’s electricity providers and generators that had to buy power at high prices during the winter storm. Why should Texans have to pay for this?
Morgan: The securitization bills that they have passed are trying to provide an opportunity to smooth out costs over a lot of years rather than for retailers to try to recoup that cost in the near term through much higher bills. I think there was probably a view that the competitive electric retailers who lost a lot of money might try to recoup that in their pricing over a short period of time, and allowing some of that cost to be securitized and then spread out over thirty years was a way to make sure that doesn’t happen. No competitive electric retailer other than companies like Griddy that were selling wholesale products, not retail, passed on their higher cost of natural gas or their higher, higher cost of electricity to residential customers. This is all speculation that there would be some increase in prices in the future.
As it relates to the competitive market, I feel comfortable that what the Legislature did helps go a long way in trying to keep, number one, prices competitive and, number two, tries to allow any increase in pricing to be spread out over a long period of time so that the consumer will not be hurt by it.
Blanchard: The costs are done—they have been realized. Should Texans have to pay? Shouldn’t they? Will they? Won’t they? I think the answer is “will,” because that’s the way the construct is set up. I tend to think it’s actually a relatively good construct. Unfortunately, yes, Texans should end up paying for it because it happened to Texans. You know, it’s not a moral judgment. It’s just kind of a factual one.
Bertin: We could have potentially saved folks money going forward by taking a deeper look at how we can lower those bills going forward with energy efficiency and lower costs on the system by reducing those wholesale costs with more distributed resources. The way that our market is structured is typically that the customers ultimately pay. Whether that is through a direct charge or if it is greater costs that are put on the various market participants that ends up increasing the cost of business, ultimately, those costs just get passed through to customers. That’s just the way that things work in the world and it’s not anything really unique to this industry.
Boyle: Throughout the beginning of the session, there was a lot of discussion about how customers who are on flat-rate plans, for example, were charged so much per kilowatt-hour and they signed up for an agreement of that sort. Now with securitization, there is an expectation that they’ll be charged more when they enter a plan that says, okay, here’s what you’re going to be charged and that’s it. That’s a real important issue, whether it’s even legal to go back to retroactively having customers paying higher bills than they would have paid under the five-year plan. That’s an important issue and one that really hasn’t been addressed.
I can remember witness after witness in February talking about all the people on flat-rate plans. They don’t have to worry about the uplift. They don’t have to worry about the ancillary charges, they have flat-rate plans. Now I think they have plenty to worry about. They’re definitely going to see billions of dollars being thrown through in surcharges. There’s no question about that. Let’s take Brazos Electric Power Cooperative, with $1.8 billion dollars of cost that they need to securitize. I don’t know how they’re going to be able to pass those costs, I really don’t. [Brazos Electric filed for bankruptcy in March, citing an inability to pay for a $2.1 billion bill from ERCOT.] I think it’s going to be very difficult to pass on the securitization costs [to ratepayers]. There are no shareholders other than the ratepayer. They’re both the customers and the shareholders. And so there’s no place else to go.