Magness Property Management
Magness Property Management – A former ERCOT executive testified that Governor Abbott told him during the winter storm to “do whatever it takes to prevent further rotating power outages.”
Bill Magness testifies before the Texas Senate Committee on Business and Commerce in his capacity as ERCOT executive director about power grid failures. Photo from the Texas Senate.
Magness Property Management
Austin, TX, February 28, 2022 — “Former ERCOT CEO says he followed Abbott’s lead when billions in bills racked up during freeze,” read the now-revised Houston Chronicle headline that made waves.
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That framing proved misleading in the second paragraph of the story, which read in part: “[Governor] Abbott wanted [grid regulators] to do whatever it takes to prevent further rotating power outages that have millions of Texans left without power.”
Magness, who was ousted from his position amid the fallout from the February blackouts, testified this week in ongoing bankruptcy proceedings involving Texas’ largest electric cooperative, Brazos Electric Power Cooperative Inc.
Brazos declared bankruptcy shortly after the lights came back on last February. It’s basically a nearly $2 billion electricity bill stemming from a 32-hour period in which the emergency ended but prices remained constrained to a ceiling of $9,000 per megawatt hour (MWh).
The Public Utilities Commission (PUC) ordered prices up to that cap earlier in the week of outages because reserve production caused an error in the pricing equation that did not “accurately reflect” the shortage conditions that trigger high prices.
Brenda Magness / Compass Real Estate
Under normal conditions, electricity on the wholesale market ranges between USD 30 and USD 50 per MWh. The Texas electricity market is an energy-only market, meaning that producers are paid for the electricity they provide, rather than a system where capacity and payments are negotiated in advance. This creates a constantly fluctuating price based on various variables.
Emergency situations, which are triggered when the reserve margin of electricity is reduced, have triggered a rise in prices. This price increase encourages producers to get as much capacity online as possible so that they can make money on the greatly increased prices.
In accordance with Newton’s third law of motion, that every action has an equal and opposite reaction, the price provides an incentive that is opposite to supply – it entices large consumers, especially producers, to disconnect so they don’t have to pay higher electricity prices. .
Woody Rickerson, vice president of system planning and weatherization for ERCOT, said at the hearing that the incentive is quite strong among industrial load users or producers. Because industrial customers buy from the wholesale market and don’t have fixed packages like most residential customers, he said when electricity prices jump, there is a measurable decline in their business.
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A two-way stimulus is a two-way street designed to ensure that the market consistently meets the ever-changing price balance between existing demand and available supply. And finding that balance is what has kept Texans paying lower electricity rates than most other states, and that has continued despite the 2021 disaster.
In that 32-hour window toward the end of the week, the PUC ordered prices to remain at that cap even after the shortages eased — and according to Magness’ testimony, that came as a directive to make sure power outages didn’t happen again.
He was given the directive by then-PUC President DeAnn Walker, who also lost her job in the fallout. Walker also testified this week at a bankruptcy hearing and was admonished by a judge for his “lack of candor … [and] lack of reliability” on the stand.
That period resulted in $16 billion in “excess costs,” according to independent market watcher Potomac Economics, the amount of money exchanged between owners exceeding what the market would have reflected if the price cap order had been lifted. The amount of money strictly tied to the wholesale electricity price order is one-fifth of that, at $3.2 billion.
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“As Texans would expect, Governor Abbott has been adamant to all involved that they must do what is necessary to keep the lights on and prevent loss of life,” Abbott spokeswoman Nan Tolson told The Texan.
“It’s the same directive Governor Abbott gave 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 “screwing up” the country after the Chronicle headline made the rounds.
“We are still paying the bills for Abbott’s release as we all pay Abbott’s tax – an average increase of at least $50 a month in energy bills for decades to come,” O’Rourke said in a statement.
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One of the legislature’s responses to the power outages was to approve premium-interest loans, called “securitizations,” for companies that had run up huge debts after having to buy power when prices were 180 times higher than normal. This allows these companies to pay off their debts over a longer period of time, decades, rather than paying them off in a short period of time or facing bankruptcy.
It also happened in the gas industry, which is an international market. Conditions in this market have been affected by the volatility seen in Europe this winter and will continue to be affected as the situation in Ukraine develops – as Russia supplies natural gas to much of Europe.
Most retail electricity providers that have had to buy electricity at the shortage price charge monthly charges to their ratepayers to pay off these debts.
Brazos is a generation and transmission cooperative that provides electricity to customers in 68 Texas counties stretching from the pan all the way to Houston. Its debt accounts for two-thirds of the estimated increased prices in the wholesale market.
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Sen. Charles Schwertner (R-Georgetown), chairman of the Senate Business and Commerce Committee, responded to Magness’ testimony by saying, “Today’s trial of former ERCOT CEO Magness appears to contradict his testimony before the last B&C committee meeting.”
“If true, this action has misled the people of Texas and compromised the integrity of the legislature.”
Schwertner was named chairman of that committee — which hosted marathon hearings on the power outages under then-chair Sen. Kelly Hancock (R-North Richland Hills) — after Hancock clashed publicly with Lt. Gov. Dan Patrick and rejected legislation that would fix of electricity transactions during this 32-hour period after the fact.
The Senate quickly passed the repricing bill, which then ran into hurdles from Rep. Chris Paddie (R-Marshall), who chairs the powerful State Affairs Committee. Speaker Dade Phelan (R-Beaumont) also opposed the legislation.
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“The last thing I want to do as a conservative is for the government to reevaluate the market,” Hancock told The Texan of the legislation he opposed.
That debate, which is nearly a year old, is important to the Brazos’ lawsuit because they’re effectively asking the court to recalculate their electricity bill because of the outages — or forgive them entirely. Brazos was unable to provide electricity to its customers because their generators were not properly weatherproofed and they then had to purchase electricity on the wholesale market to meet their obligations.
They also failed to hedge their prices, a method used to hedge against price volatility by buying services—in this case, production—in advance at a typically higher-than-market rate. Companies that hedged their prices against the storm avoided these huge debts.
Brazos has been buying electricity on the wholesale market, a strategy that usually yields lower prices but carries risk in the unlikely event of a sudden shortage. That risk hit home in the form of a once-in-a-century winter storm, leaving the Brazos to reap what they sowed.
Fred Van Magness
If Brazos’ request is granted, the $2 billion in debt will be transferred to the entire market so that all other ERCOT participants will absorb the cost of Brazos’ debt. A number of other ERCOT market participants — Calpine, NRG Energy, Nextera Energy and others — filed amicus briefs opposing Brazos’ complaint.
That other companies making progress in paying down their own debt would object to one of their competitors claiming an exemption is not surprising. ERCOT’s counterargument to Brazos is that they, like everyone else, knew the situation and were willing participants in the wholesale market.
And Magness, now stuck in the middle of a fight between political factions and those who want to push the Texas grid in another direction, had to steer Texas away from total grid collapse during the disaster while water flooded his house.
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Brad Johnson is a senior reporter for The Texan and an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who enjoys watching his favorite teams continue their title-winning drought throughout his life. In his spare time, you might find Brad quoting Monty Python productions and trying to calculate the airspeed of an unladen swallow.
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