“Experience is the hardest kind of teacher. It gives you the test first and the lesson afterward.
Oscar Wilde
Perspective.
We gain perspective through experience. Especially extremely difficult experiences.
Hopefully, all our experiences enable us, especially leaders, to develop a broader perspective that incorporates the feelings and values of others.
Regarding Winter Storm Uri and the subsequent financial impact in RTO markets, many different perspectives exist.
Some people experienced financial windfalls and others received a permanent body blow that will impact communities for many years.
When it comes to the free market, winners and losers will always exist.
But can we afford to continue to allow unabated volatility to continue to exist in RTO markets?
During my thirty-two years of experience on bond and energy trading floors, I know that luck is often confused with skill or wisdom. So, with a serving of humble pie served after your filet mignon celebratory dinner, you need to ask yourself a few questions.
What if my company was the bug instead of the windshield?
Could I survive? Would my stakeholders survive?
Its Not a Price Cap
Whether they be $2,000 or $9,000, we need to be clear on a simple point regarding price caps.
They are not price caps.
They are targets.
In a sense, they become goals. Goals provide long term vision and short-term motivation.
My point is not to discuss the pros and cons of price caps, or even how they are arbitrarily set. Rather, I am raising the point that price caps with arbitrary duration periods introduce unmanageable price and volume risks in today’s RTO markets.
We know this to be true because Texas ratepayers will be ultimately saddled with about $38 billion in excess energy costs.
We know this is true because the decision to set wholesale electricity prices at $9,000 per megawatt-hour for an extended period basically made many market participants’ Risk Policies obsolete.
And not just in ERCOT.
Winter Storm Uri was as also a significant event for SPP & MISO.
Keeping the Lights On
During my twenty years of working in the public power community, I became intimately aware of the sense of service and pride towards serving a community that you call home.
I also noticed a similar level of passion and commitment during my one year with an IOU.
Whether people work in public power, private or an electric cooperative, these folks remind me in many ways of our military.
They stand on a post and say, “Not on my watch.”
In ways like how we feel about our children, they would do anything possible to fulfill their core mission to provide power in the most reliable and cost-effective manner possible.
During my attendance at the APPA conference a few weeks ago, I met and spoke to many people who shared the heartache to see not only rolling blackouts, but also the experience of walking into the office of their CFO to explain how they just spent anywhere from $10,000,000 to $40,000,000 on natural gas to serve load.
Full well knowing the long-term financial impact of spending unbudgeted millions.
Want to gain a different perspective?
Listen to people who were responsible to make these decisions and then look in their eyes.
When you do, I just do not see how we can allow it to happen again.
Especially when you consider the roles could be reversed in the next extreme event.
Circuit Breakers
In Oklahoma, Oneok Gas Transmission (OGT) reached what might be the highest natural gas hub in history at an average of $1,192/MMBtu on February 17th.
The spot price of OGT was $2.92/MMBtu during the first week of February.
RTO markets do not control the price of natural gas. But they sure do experience the brunt of ballistic prices.
The people working at RTO markets take reliability with the same passion and commitment as the utilities. They would move heaven and earth to provide reliability during artic blasts or summer heat swells.
They know lives hang in the balance.
Would we rather have these folks focused on reliability or finance during these extreme periods?
Would it hurt for regulators to introduce “circuit breakers” in the natural gas market in a manner like our stock market?
An opportunity for everybody to catch a breath and perhaps gain a broader perspective?
Should we consider establishing a different set of market operations during these crisis moments? Do participants really need to commit to a four-day decision when directed to procure fuel at any cost?
Is it necessary to monetize the never spoken but widely understood truth that market operators and participants will generally pay any price to keep the lights on to keep us safe?
In any fight, a good corner person knows when to toss the towel into the ring and stop the fight.
Circuit breakers could take the decision-making process away from those in the ring and allow the market to calm down.
And allow regulators to make a thoroughly considered decision regarding emergency pricing procedures.
Here’s to Never Forgetting
Before he became widely considered one of the greatest college basketball coaches in history, Mike Krzyzewski experienced failure as the head basketball coach at Duke.
Coach K went 38-47 during his first three years and lost 109-66 in the 1983 ACC tournament to Virginia.
At 2 AM the morning after the loss to Virginia, Coach K gathered at a local Denny’s with a small circle of friends and supporters. One of Mike’s friends raised a glass of water and made a toast.
“Here is to forgetting tonight”
Coach K then raised his glass and made a toast.
“Here is to never forgetting tonight.”
Mike Krzyzewski was always looking at failure as a way to lead to success. Perhaps better than any other coach in history.
Duke won the next sixteen matchups with the University of Virginia.
In a similar way, FERC, NERC and RTO/ISO Markets need to work together to never forgetting what happened in February.
People are not perfect, and neither are the markets that people create.
All risk can never be eliminated.
But the price and volume risks of arbitrary price caps with arbitrary duration introduce levels of risk that need to be addressed immediately.
We need to stop placing people who operate these markets and serve their communities in impossible situations with unknown financial impacts.
Some days you’re the bug, some days you are the windshield.
You just never know which it will be.