By Leonard Hyman & William Tilles
Unprecedented winter storms hit Texas. The electricity grid cannot deal with excess of demand over supply. Prices soar. Rolling blackouts. Expect more says the grid operator. What the stories do not say is that Texas, long ago, cut itself off from the interties to the rest of the country that might have provided some aid in a time of extreme distress. Texas might as well, electrically speaking, be an island in the middle of the Pacific.
So, let’s skip the discussion about the arctic temperatures affecting the US as far south as Texas. Let’s focus instead on the fact that Texas, unlike every other state in the lower forty eight, comprises its own power grid called, ERCOT, the Electric Reliability Council of Texas. And the ERCOT grid is managed by a state agency of the same name. But why?
Trying to condense 140 years of electric utility history is daunting but we believe the key here is state’s rights. This relies on the key distinction between intra-state and inter-state activities. Federal jurisdiction over commercial activities are generally limited to interstate commerce or “commerce among the several states” in the original language of the Constitution. The Federal Power Act, granting federal authority to build, own and operate electric infrastructure, was passed by Congress in 1934. At the same time a new federal administrative body was created, predecessor of our current FERC, to regulate interstate (or today we would say wholesale) electricity transactions.
The ERCOT electric system is designed, apart from its other myriad functions, to evade federal jurisdiction. Period, full stop. One relatively recent irony here is that the FERC has been extremely generous in awarding above market authorized returns on equity for its utilities as well as in other policy areas. From an investor owned utility executive’s perspective, this is like chaining yourself to the couch while the free money truck rolls past your house distributing largesse. In all fairness there was no way to know a Rooseveltian “tiger” would become a policy “pussycat” although it didn’t actually begin to happen until Eisenhower’s first administration almost twenty years to the day later.
So in order to circumvent federal jurisdiction, in favor of presumably more favorable state utility regulation, the state intentionally became an “island” with respect to electrical connectivity with the rest of the country. At the time this made sense. Texas had all the scale and commodity infrastructure suitable for making electricity: oil, coal, lignite as then later natural gas.
We have no desire to engage in debate about the wisdom of this interconnection “islanding” policy. It reflects a policy choice.
Going forward the interesting question is not what to do but what will the climate look like? The present dilemma this week is a potential shortage of electrical power due to extreme cold weather. But from a perspective of extreme weather events, we see a growing prevalence of heat extremes versus cold weather extremes. In other words, building up capacity reserves for summer air conditioning loads (Austin for example was routinely over 100 degrees last summer) has been more vital than wintertime heating demand—until now. Other electric systems can access reserves from places with different demand patterns (and climate). That allows them to keep lower reserves locally. Not so with Texas.
We will conclude with the idea of insurance. An electrical system conceptually resembles an insurance policy. Both ask the same basic question: “how much are policyholders or electricity users willing to pay against the chance of some adverse outcome?” How much extra are they willing to pay for political independence? There are differing, valid answers to these questions. Our point here today is simply that Texas from a wholesale electricity perspective is truly the “lone star state”.
By Leonard Hyman and William Tilles for Oilprice.com