EnergyStatewide NewsTestimony From Former ERCOT CEO Sparks Frenzy Over Cost of Blackouts

The former ERCOT CEO testified that Gov. Abbott told him during the winter storm to "do whatever necessary to prevent further rotating blackouts."
February 28, 2022
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“Ex-ERCOT CEO chief says he was following Abbott’s direction when they ran up billions in bills during the freeze,” read a now-changed title from the Houston Chronicle that made waves.

That framing was proven misleading by the second paragraph of the story, which read in part, “[Governor] Abbott wanted [grid regulators] to do whatever necessary to prevent further rotating blackouts that left millions of Texans without power.”

Magness, who was pushed out of his position during the fallout from the February blackouts, provided testimony this week in the ongoing bankruptcy proceeding involving Texas’ largest electricity cooperative, Brazos Electric Power Cooperative Inc.

Brazos filed for bankruptcy shortly after the lights turned back on last February. At root is a nearly $2 billion electricity bill stemming from a 32-hour period wherein emergency conditions had ceased but during which the prices remained forced to the $9,000 per megawatt-hour (MWh) cap.

The Public Utility Commission (PUC) ordered prices to that cap earlier in the week of the blackouts because reserve generation caused an error in the pricing equation failing to “accurately reflect” the scarcity conditions that trigger the high prices.

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In normal conditions, electricity on the wholesale market trades at between $30 and $50 per MWh. Texas’ electricity market is an energy-only market, meaning that generators get paid for electricity provided rather than a system where capacity and payments are negotiated upfront. This creates a constantly fluctuating price based on sundry variables.

Emergency conditions, triggered when the reserve electricity margin shrinks, set off price increases. That price increase incentivizes generators to get as much capacity online as possible so they can cash in on the massively risen prices. 

True to Newton’s third law of motion that every action has an equal and opposite reaction, the price provides an incentive opposite the supply — enticing large consumers, especially manufacturers, to go offline so they don’t have to pay the ramped-up electricity prices.

Woody Rickerson, Vice President of System Planning and Weatherization for ERCOT, testified in the hearing that this incentive is quite strong among industrial load users, or manufacturers. He said that, since industrial consumers purchase on the wholesale market and do not have fixed-rate plans like most residential consumers, there is a measurable drop in their operations when electricity prices jump.

The bilateral incentive is a two-way street meant for the market to consistently meet the ever-changing price equilibrium between existing demand and available supply. And pursuit of that equilibrium is what has allowed Texans to pay lower electricity prices than most other states, which has continued even despite the calamity of 2021.

During that 32-hour window toward the end of the week, the PUC ordered prices to remain at that cap even after the scarcity lessened — and per Magness’s testimony, that stemmed from a directive to ensure blackouts didn’t reoccur.

The directive was relayed to him by then-PUC Chair DeAnn Walker, who lost her job in the fallout, too. Walker also testified this week at the bankruptcy hearing and was lambasted by the judge for a “lack of candor…[and] lack of reliability” on the stand.

This period resulted in $16 billion in “overcharges” as estimated by the independent market monitor Potomac Economics, the amount of money that exchanged hands in excess of what the market would’ve reflected had the price cap order been retracted. The amount of money strictly tied to the wholesale electricity price order is one-fifth of that, at $3.2 billion.

“As Texans would expect, Governor Abbott was adamant to everyone involved that they must do what was needed to keep the lights on and to prevent the loss of life,” Abbott spokeswoman Nan Tolson told The Texan

“This is the same instruction Governor Abbott gave to the PUC and ERCOT earlier this year: do what needs to be done to keep the power on.”

Democratic gubernatorial candidate Beto O’Rourke accused Abbott of “screw[ing]” the state after the Chronicle title made the rounds. 

“We’re still footing the bill for Abbott’s betrayal as we all pay the Abbott Tax — an average increase of at least $50 a month on our energy bills for the coming decades,” O’Rourke said in a statement.

One of the legislature’s responses to the blackouts was to approve premium-interest loans, dubbed “securitization,” for companies who amassed massive debts after having to purchase electricity when prices were 180 times their normal rates. This allows those companies to pay off the debt over an extended period, decades, rather than pay them off in the immediate short-term or face bankruptcy.

It also occurred in the gas industry, which is an international market. That market’s conditions have been affected by the volatility on display in Europe this winter, and will continue to be impacted as the situation in Ukraine unfolds — as Russia supplies natural gas for much of Europe.

Most Retail Electric Providers who had to purchase the scarcity-priced electricity are charging monthly fees to their ratepayers to pay off these debts.

Brazos is a generation and transmission cooperative that provides electricity to customers across 68 Texas counties stretching from the panhandle all the way to Houston. Its debt accounts for two-thirds of the estimated wholesale market overcharge.

Sen. Charles Schwertner (R-Georgetown), chair of the Senate Business & Commerce Committee, reacted to Magness’s testimony, saying, “Today’s trial testimony by former ERCOT CEO Magness appears to contradict his testimony before the B&C committee last session.”

“If true, this action misled the people of Texas and has put at peril the integrity of the Legislature.”

Schwertner was appointed to chair that committee — which hosted marathon hearings on the blackouts under then-chair Sen. Kelly Hancock (R-North Richland Hills) — after Hancock publicly clashed with Lt. Governor Dan Patrick and disapproved of the legislation that would’ve repriced electricity transactions during that 32-hour period after the fact.

The Senate fast-tracked its repricing bill, which then met a brick wall in Rep. Chris Paddie (R-Marshall) who chairs the powerful State Affairs Committee. Speaker Dade Phelan (R-Beaumont) also opposed the legislation.

“The last thing I want to do as a conservative is have the government reprice the market,” Hancock told The Texan about the legislation he opposed.

That debate, while almost a year old, is relevant to Brazos’ suit because they are effectively asking the court to reprice their electricity bill from the blackouts — or forgive them entirely. Brazos could not provide power to their customers because their generators were not adequately protected against the weather and then had to purchase electricity on the wholesale market to fulfill their obligations.

They also failed to hedge their prices, a method used to protect against price volatility by purchasing service — in this case, generation — in advance at a usually higher-than-market rate. Companies that hedged their prices in advance of the storm avoided these massive debts.

Brazos had been purchasing electricity on the wholesale market, a strategy that usually yields cheaper prices but comes with the risk in an unlikely sudden spurt of scarcity. That risk hit home in the form of a once-in-a-century winter storm and Brazos is left reaping what they’ve sown.

If Brazos’ request is accorded, then the $2 billion debt will be uplifted to the entire market, leaving all other ERCOT participants to shoulder the cost of Brazos’ debt. Many other ERCOT market participants — Calpine, NRG Energy, Nextera Energy, and more — have filed amicus briefs in opposition to Brazos’ appeal.

That other companies, who are moving forward with paying off their own debts, object to one of their competitors asking for an exception is no surprise. ERCOT’s counterargument to Brazos is that they, like everyone else, knew the conditions of the situation and was a willing participant in the wholesale market.

And Magness, now stuck in the middle of a fight between political factions and those looking to push Texas’ grid in a different direction, was during the calamity having to steer Texas away from a total grid collapse while a water break flooded his house.

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.