KILOWATT HOURS, AVOCADOS AND DEREGULATION
February 26, 2021 § 4 Comments
The title is adapted without a modicum of shame or contrition from a Paul Krugman New York Times opinion piece. While you will see my engineer’s spin on all this market economics stuff in this piece, his linked opinion is a must read. At least take in the brilliant title: Et Tu, Ted? Why Deregulation Failed. The Julius Caesar/Brutus reference aside (inspired, I imagine, by the Ted statement undercutting a principal tenet of Texas energy policy), it is a clear exposition of when free markets fail. From a Nobel Laureate in Economics, no less. The Ted mentioned is of course Senator Ted Cruz, whom Krugman in droll fashion describes as R-Cancun. The press being woefully bereft of scandalous behavior by elected officials (only so much ink you can give to that Congresswoman) is giving the full treatment to Cruz, his wife Heidi (managing director at Goldman Sachs), St. Johns High School (elite private school in Houston) and group chat.
As you know from my previous take on the Great Texas Freeze, Texas has an independent power grid. It is run by ERCOT, a non-profit agency regulated by the state. By not crossing state lines, it avoids being regulated by the Federal Energy Regulatory Commission. This independence from the feds has been fiercely defended by many in current and former elected office. The regulations, such as they are, were reputedly fashioned largely on concepts laid out by Harvard professor William Hogan. They allow wholesale prices to go up to a maximum of USD 9 per kilowatt hour (kWh). The average consumer price in Texas normally is around 12 cents per kWh, and closer to 9 cents in winter. In other words, regulations allow householders to be charged up to 100 times more than normal (wholesale and consumer prices are not directly comparable, but the multiplier is still huge). Avocados (Krugman’s favorite for the argument I am about to make) doubled in price during a shortage in 2019. Consternation in Mexican restaurants (and the holy guacamole jokes) aside, consumers could simply eschew the green fruit (yes, it is a fruit, as is the tomato, despite an 1893 Supreme Court decision decreeing it a vegetable!). Lowered demand and some remedy on the supply side restores prices. The way it is supposed to work.
But electricity access is not like avocados. When used for heat in winter it is a necessity, not a choice (even a natural gas fueled heating system needs electricity to run the blowers). A period without guacamole in the diet would scarcely register on the privation scale whereas sustained frigid temperatures could be life threatening.
But the strongest argument for more regulation ensuring supply is that the supply chain is interdependent. A turbine operator cold hardening the blades in the expectation of profiting from the high prices during a freeze caused shortage may have fuel supply interrupted, vitiating the business strategy. In the case of natural gas, the primary fuel for electricity in Texas, the cold hardening would simultaneously have to be done by at least the gas producer, the midstream operator (of the pipeline) and the electricity generator. Just any one of them doing it may not realize the profit uptick while still incurring the cost.
Texas politicians are in no win positions. They favor free-market methods but must deal with the fallout from crushingly high electricity bills faced by some consumers. The tweeted statement by Senator Cruz that led to the Et tu Ted opinion by Krugman was: “This is WRONG. No power company should get a windfall because of a natural disaster”. The problem with that statement is that it flies in the face of the basic de-regulated model that private companies are incentivized to spend the money to harden for these situations in hopes of high profits during those interludes. On the assumption that Senator Cruz understands the model, his statement appears to be a repudiation of a tenet of Texas energy policy. Hence the Et tu (meaning you too)wording in the Krugman piece (Julius Caesar utters Et tu Brute in anguish when he sees that his friend and protégé Brutus is one of the assassinating senators).
Many have taken the position that one cannot spend the money to prepare for the infrequent occurrences. Hard to argue with this in principle. However, I will give you the example of El Paso, Texas. After a freeze in 2011 of similar scale as this one, the state studied the matter. The city of El Paso simply acted. They had previously divorced themselves from ERCOT and were joined with the Western Interconnection. With no compulsion to act as the rest of Texas, they spent nearly USD 4 million to harden their grid to -10 F. They built a dual fired power station, using oil or gas. This time around, in a city with 680,000 residents, fewer than 1000 customers had electricity black outs for greater than 5 minutes. Since rate payers always pick up the tab, what then was the impact on rates? The average residential rate in El Paso is 11.11 cents per kWh, compared to the average for Texas of 10.98 cents. A straight up comparison is difficult, but those figures are not very far apart, 1.1% to be exact.
Was the privation suffered in the great Texas freeze an indictment against free-market models of electricity access? Probably not. But economists advising the state must conjure up a framework with built in elements of social responsibility and a greater recognition of the inter-dependencies in the supply chain. The folks least able to withstand extended loss of power and/or costly energy for survival, need a safety net. Another such devastating disaster, to borrow another Roman analogy, will have state leaders facing charges of fiddling while Texas froze.
February 26, 2021