On the surface, Texas and California appear to offer two starkly contrasting ideological approaches to running a state—one extremely conservative, the other extremely progressive. However, in practice, they are surprisingly similar.
- "My way or the highway"
- "I am right, you just do not know it yet"
- "My ball, my bat, my field"
Neither Texas nor California’s PUC shows much interest in anything challenging their authority.
The recent decision by the Texas Supreme Court in the Luminant Energy versus the Texas PUC case seems to enhance the power of the Texas Public Utility Commission. This decision leaves all ERCOT energy market participants at the mercy of the Texas PUC's unpredictable whims. Regulatory uncertainty and financial risk ultimately harm any commodity market.
The decision by the Texas Supreme Court in favor of the Texas PUC may signal the beginning of the end for FERC’s twenty-five-year experiment with organized energy markets.
Southeastern utilities may have been wise to avoid participating.
The Texas Two Step: A Chat with the Texas PUCT
During a private call with investors hosted by Bank of America Securities, just a few weeks after Winter Storm Uri devastated the state, Texas Public Utility Commission chairman Arthur D’Andrea addressed the fallout from the February power crisis.
In this closed-door meeting, D’Andrea sought to reassure investors that high-priced electricity trades, executed at the market’s maximum allowable rates during the crisis, would not be reversed. This reassurance aimed to alleviate investor concerns about potential financial losses that could affect trading firms and publicly traded generating companies.
I apologize for the uncertainty,” D’Andrea said, promising to put “the weight of the commission” behind efforts to prevent billions of dollars from being refunded to utilities. These utilities had been forced—due to PUC decisions—to buy power at sky-high prices even after the worst of the blackout had passed. His assurance aimed to alleviate investor fears about potential financial losses impacting trading firms and publicly traded generating companies.
Not a mention of the pain inflicted upon the consumers brought upon by the PUCT’s decision that even the Market Monitor immediately declared was wrong.
And of course, that call was not made available to the media or the public.
In the United States, Public Utility Commissions generally regulate the rates and services of a public utility.
So why was the Texas Public Utility Commission so focused with protecting the profits of the trading companies and the banks from outside the state of Texas?
Use your imagination…
Secrecy & Power
I recently finished reading G-Man : J Edgar Hoover and the Making Of the American Century. The book was published in 2022 and received the Pulitzer Prize. Beverly Gage lays out the evidence and tells the story about what happens when we allow one federal institution to accumulate unquestionable authority with zero checks and balances.
The same thing can happen when a state run organization, whether it be ERCOT or California ISO, believes it has god like authority independent of the federal government.
Since the inception of RTO markets, market participants have struggled to understand the logic and mechanisms of the “Black Box” that spits out locational marginal prices. While we have often nit-picked the results of these locational marginal prices, and experienced the occasional market repricing to correct some errors, we have never ever witnessed such a brazen act by a PUC to overrule the Black Box instantly and then sit back and allowed the money to flow to outside entities.
While ERCOT is technically not an RTO, it does operate a wholesale electricity market. I believe the decision by the Texas Supreme Court will ultimately harm all energy markets in some unique ways.
All organized energy markets are basically a managed relationship between market participants to preserve and enhance reliability as well as to operate more efficiently and effectively via some type of economic dispatch of generation.
They are not about making paupers and millionaires out of market participants in some twisted version of musical chairs.
Losing trust can have negative and long-lasting impacts to any relationship.
What Is Next ?
I believe the impact of the decision will present both short term and immediate impacts to the wholesale energy markets.
We will likely see an increase in Big Tech continue to carve out their own electricity supply agreements outside of these organized markets. Do not kid yourself, there is a reason why Big Tech seems to be gravitating to the Southeastern United States now. Capital has a funny way of flowing to where it feels most welcomed or less threatened. What company in their right mind will risk their future to decisions made by three attorneys behind closed doors?
What about the Big Tech companies in a state like Texas or California?
I believe that we will see a renewed interest by to seek to purchase small public power companies or reach agreements with a small electric cooperative who would welcome the opportunity to serve a reliable load for many years along with the good paying jobs it will bring. In return, Big Tech will assume ownership of the development of the Integrated Resource Planning to ensure a reliable and affordable energy supply.
But wait you say, I thought those responsibilities rest with the state regulators or the organized energy market?
That is what happens when you lose trust.
The public may have to sit back and accept it, but Big Tech does not.
I find the relationship between Bluebonnet Electric Cooperative and tesla to be fascinating and insightful.
Since the Texas Supreme Court now has set precedent that it’s impossible to “unscramble the egg”, otherwise known as market repricing for the past twenty-five years, I think its likely other markets will take the cue and do the same going forward.
“Here is your price. Take it or leave it.”
Finally, I believe the decision by the Texas Supreme Court will have an impact on the western markets and the southeastern U.S.
Faced between a choice between CAISO or SPP, market participants may well consider the long-term potential economic, financial and legal implications of that decision.
Major Southeastern utilities will continue to push back hard on organized markets. Why should they give up their competitive advantage and control over their future?
Beware of joining an RTO where the PUCT owns extraordinary power.
Conclusion
Setting legal precedence can sometimes be good and sometimes bad.
The decision by the Texas Supreme Court to affirm absolute power to the PUCT is bad and will have broad reaching impacts both short term and long term.
When RTO markets began many years ago, the return of shared economic dispatch became instantly transparent and accepted.
However, as complexity increased and these markets strayed further and further away from the intended purpose, the value proposition is not so clear anymore.
The introduction of mass scale technological advances, distributed energy resources, and new generation requirements all make the current wholesale market design obsolete.
The current power grab by some Public Utility Commissions that shun logic and market monitors make the ratepayers liable for negligence and a backstop for whatever entity drives these PUCs behind closed doors.
The Texas Two Step will have far reaching impacts.