What Happened with the Texas Energy Grid

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Guy DeSanctis:  Welcome to The Federalist Society's webinar call. Today, June 28, we discuss what happened with the Texas energy grid. My name is Guy DeSanctis, and I'm Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today, we are fortunate to have with us Barry T. Smitherman, attorney, and consultant, and teaches at UT Law School, and was also Chairman of the Public Utility Commission in Texas as well as the Railroad Commission.

 

      And also, Raymond L. Gifford. He counsels commissions, electric and gas utilities, and information technology companies on state and federal aspects of regulation, administrative law, and competition policy. He was also Chairman of the Colorado Public Utilities Commission.

 

      Throughout the panel, if you have any questions, please submit them through the question and answer feature or the Chat so that our speakers will have access to them when we get to that portion of the webinar. With that, thank you for being with us today. Barry and Raymond, the floor is yours.

 

Raymond L. Gifford:  Thanks, Guy. Barry, good to see you.

 

Barry Smitherman:  Good to see you, Ray.

 

Raymond L. Gifford:  It's always good to have a couple of old regulators come together [Laughter]. And we're going to do this a little differently, I think, than a lot of Federalist Society events in that we're probably not going to debate each other so much as kind of talk about what happened in Texas and what might be done about it. I promise that you'll bring a good deal of pro-Texas chauvinism, and I'll do my best to bring anti-Texas chauvinism if that works for you.

 

Barry Smitherman:  You know, I'm sure I'm going to be victorious because the pro-Texas chauvinism is so strong. But I enjoy these conversations that we've had for — I don't know — 20 years now.  

 

Raymond L. Gifford:  Me too. So let's start with what makes Texas and its electric grid different than the rest of the country?

 

Barry Smitherman:  Well, ERCOT, as you know, is an energy-only market. It's the only energy-only market in North America. So our generators make money by selling electricity. They don't get paid to put steel in the ground. There's no capacity payment mechanism. And they make a decision about building generation based on price discovery and prices that are realized in the market.

 

      Oftentimes, during very limited periods — so let's say during a couple of days in August or, as we'll discuss, a couple of days in February — if you're running, you have an opportunity to make a lot of money in a short period of time. Really, the only part that's regulated by the Texas PUC are the wires companies. So we have CenterPoint, Oncor, and AEP wires companies. And then we have four non-ERCOT utilities, El Paso Electric being one of them, for example. Still regulated the old-fashioned way. They build generation. They own wires and poles. They bill the customer.

 

      Then we have some 70-odd municipally-owned utilities, San Antonio and Austin being the two biggest. So they operate in the market. As well as a like number of co-ops, Pedernales Electric, for example, being the largest co-op in America, is part of the ERCOT system. So when I talk about ERCOT, I'm talking about a region, and I'm talking about a market, and thirdly, I'm talking about an organization with 6 or 700 employees that manage the flow of electricity in most of Texas. Let's call it 85 percent of the land and 90 percent of the load. So that makes it interesting and complicated all at the same time.

 

Raymond L. Gifford:  And, as you Texas regulators have never tired of telling the rest of us regulators around the country for 20 years, you would say you probably have the purest market competition model we've seen in U.S. electric markets. Is that right?

 

Barry Smitherman:  Well, I think it's the closest to competition. It’s not purely competitive because there are still rules and regulations coming from the PUC. There are regulations about market share, market power abuse by the generators, so the way I describe it, the generators and the retailers are sort of overseen by the PUC. They're not free to run without any rules and regulations. But we do allow prices to rise. There have been some tweaks in the market over the last couple of years to try to find the missing money that people talk about in terms of a generator who spends a lot of money to put steel in the ground but can't recover that from selling electricity. So that is an issue.

 

      Then we procure reserves. So ERCOT actually goes out and procures responsive reserves, spinning reserve, non-spin, and black start. You wouldn't probably do that in a purely competitive market, but those are considered sort of reserved backstop issues. And from time to time, we have active participation by load. So ERCOT procures load acting as resource another tool to try to prevent an outage or shortage. So, Ray, I think it's very competitive, but it's not completely competitive.

 

Raymond L. Gifford:  Now, and I think we want to talk about that and want to talk about prices, but let's get to the dramatic events that happened last February where you had an unprecedented cold snap in Texas and the grid, or the market depending on how you want to describe it, failed. Texas had blackouts, prices went enormously high, people were cold and in the dark, and many people died. It was nothing short of a catastrophe. So what happened? And then let's talk next about what factors there are to blame for what happened.

 

Barry Smitherman:  Yeah, so, remember, again, going back to our energy-only market, the Public Utility Commission cannot compel anybody to build anything. So generators build generation resources based on their expectation of making money. We have a pretty robust mix of generation. That's important to understand. It's primarily natural gas, but we also have about, I guess maybe, 5,500 megawatts of nuclear. We have a fair amount of coal. Last year coal was about 18 percent of our energy.

 

      And then a big story, as you know, has been wind. So last year we got 23 percent of our energy from wind. And the wind capacity probably is 25 to 30 gigawatts today. So a lot of wind. When the wind's blowing, the wind occupies a fair amount of the supply stat.

 

      Going into Valentine's Day weekend, it was getting cold. And, in fact, to their credit, ERCOT, Inc., the grid operator, began putting out — I'd say as early as February 7 or 8 — notices that it's going to get really cold and you need to be doing all the things that one would do in preparing for cold weather. Now, I think in hindsight that messaging went out primarily to the inside baseball crowd. I mean, you did not see that on social media, Facebook, Twitter, lest -- even, I have ERCOT's app on my phone, and I don't recall taking a look at that. Certainly, no billboards, no TV commercials, but they said it's going to get cold.

 

      On Valentine's Day, it started getting really cold. And, in fact, it fell below freezing and remained there for most of the state through Thursday. So that's unprecedented. I know in Colorado and in the Northeast, they get really cold weather, and that is a different dynamic than we have here. We're a summer peak generation resource. We're not a winter peak generation resource.

 

      So it got really cold. The wind had been blowing fairly robustly in the weeks leading up to that. February is a good wind month, not a great month. March and April are probably the same. But as the cold started to settle in, the wind went almost to nothing. I think at one point, it was like 500 megawatts it went. And everything started freezing up. So beginning at -- and the prices started rising in response to that, which is what you would expect in the market. As we begin to go into shortage periods, prices rise.

 

      If you and I owned a generation resource, we'd be doing everything in our power to make sure it's running so that we could make money during this rising price period. And it reached the cap of $9,000.00 a megawatt-hour, which is our cap, beginning late in the evening on Valentine's Day. And then quickly, resources started falling off the grid. There was about 25,000 megawatts that was in outage all ready going into Valentine's Day. Some of that was for planned maintenance, some of it was -- it just -- when it got a little bit cold, some of it didn't work, including the wind. So at 1:23 a.m. on the 15th, ERCOT rapidly went from EEA1, which is conservation, EEA2, to EEA3, which is outage -- rolling outages. And at --

 

Raymond L. Gifford:  And rolling -- yeah, and rolling outages, for those who aren't steeped in this stuff, you've got a supply -- demand and supply on the electric grid has to match 60 times a second. Right?

 

Barry Smitherman:  Yeah.

 

Raymond L. Gifford:  And if it doesn't, you've got to start shedding demand to match the supply that you have. And that's when you roll blackouts. Right?

 

Barry Smitherman:  Instantaneously, yeah. ERCOT has one tool at its disposal. Because it cannot increase generation, it has to tell the wires companies to turn people off, and that's the way it keeps it balanced. So it began to send out orders to the wires companies to begin rolling outages. And during this period of time, prices remained around 9,000. They sort of gyrated up and down, if you will.

 

      If you can imagine in a market with 600 plus resource nodes and millions of customers as resources are trying to get back on, and then they fall back off, and load is getting off because prices are high. The amount of reserves and prices gyrate back in an inverse relationship. That was sort of happening, but the amount that was shed was 10,000 almost immediately. Ultimately, 20,000 megawatts of load was dropped. And at one point, half of all the generation opportunity capacity in ERCOT was not operating. So that --

 

[CROSSTALK]

 

Barry Smitherman:  This test stated these dramatic directions to roll outages. And let me just say one other thing, and that became a point of contention because, in many cases, they didn't roll. A person went dark in Houston or Dallas and stayed that way for a long period of time because everyone — everyone on the supply side — was so nervous about losing even more generation that they were afraid if they brought somebody up who had been taken down, that that would further jeopardize the system, and they'd have to bring them back down and bring others back down at the same time.

 

Raymond L. Gifford:  So we have just an enormous catastrophe -- an enormous human catastrophe, enormous political problem, and an enormous regulatory problem. So let's get to some of the interesting things. What I noticed in the weeks after, the days after, you went to the trade press, you went to the main press outlets in Texas, and everybody kind of retreated to their priors. Right?

 

      So you had half the world saying this was all because of renewals. And you had another half of the world saying, no, it's because fossil didn't show up. And then there was me up here saying, no, it's an institutional failure -- that it's an institutional and regulatory design failure. So let's go through those. Let's proceed to the recrimination stage. Who is to blame, Barry?

 

Barry Smitherman:  Well, I'm looking at three articles on my desk here, Ray. One says coal failed. One says gas failed. And the other one said wind failed. So as you articulated, whatever your predisposition was going into that, you reinforced your predisposition. You can go to the ERCOT website, and you can see unit by unit what generation units failed. They all failed: gas, coal, wind, even nuclear.

 

      One of the nuclear plants had a water leak. To make electricity, you basically take water and turn it into steam, and you run a turbine, and when it's three degrees or less, water freezes, and that happened. So all of the generation resources failed, so you could selectively pick the one that you don't like and make a story out of that. And that's part of what we saw.

 

      There was also a recrimination zone, ERCOT, Inc., that they didn't do enough, or their messaging was terrible -- and we'll come back to that. We'll come back to what happened with the legislature. And then, one of the things I really want to hit is the PUC's intervention on Monday afternoon, the 15th, to set prices at the cap at 9,000 administratively and leave them there for the next 4 days, including the last 32 hours when ERCOT had canceled their orders to drop load and yet maintained the $9,000.00 price cap administratively for all day Thursday into Friday morning.

 

Raymond L. Gifford:  So let's get this straight and let's emphasize this, which is the free ERCOT market that allows price discovery and supply and demand to equilibrate based on what consumers demand and what suppliers can get. For that week, the regulators set the price administratively at $9,000.00 a megawatt-hour. Presumably, to induce more generation into the market?

 

Barry Smitherman:  Yeah. And this is a fascinating and tragic story because Monday afternoon, the 15th, at 5:20 p.m., the PUC had a 6 minute and 18 second emergency meeting. It's available on the PUC's website, and you can listen to it where they say based on information they've gotten from ERCOT and others, the ERCOT pricing algorithm, pricing methodology -- I think they say there's some anomalies, is not working correctly. Theoretically, it ought to be at the cap if we're in scarcity. And so they set it at the cap, and it stayed there until Friday morning.

 

      Now, you can do the math on this, $9,000.00 times, let's say, roughly 50,000 megawatts a load that week. By the way, had there not been any outages, it would be expected that the load would have peaked at about 75,000 megawatts. That's how cold it was. So you do that times 90 hours. I think the math is about $45 billion. Yeah, that's what happened.

 

      And I want to contrast this with what happened ten years ago in — almost exact date — February 2011. We had a seven-hour outage. The weather was cold but not quite this cold. Prices also went to the cap, which was 3,000 at the time. The PUC did not intervene. Prices came back down. They gyrated up. They found their equilibrium. And what is fascinating to me, Ray, is about 30 minutes before we came out of the outage ten years ago, prices had all ready settled to about $50.00 in anticipation that we were coming out of the outage.

 

      I mean, the market knows better. As Pat Wood once said, "The market on its worst day is better than regulation on its best day." And so I think that that is the best example we have of the danger of intervening administratively and then not revisiting that decision during the week.

 

Raymond L. Gifford:  Well, by the end of the week, there was nobody left on the Public Utility Commission of Texas, is my recollection, Barry.

 

Barry Smitherman:  Well, they were still there [Laughter]. They were still there but quickly after the lights came back on, and the heat came back on, the legislature, which was in session, began to hold hearings, and we saw the Chairman resign first at the request of lieutenant governor, and then one of the Commissioners.

 

      Then, in what is to be strived as a group tragedy, the third Commissioner — is a terrific, nice, young guy, lawyer, very confident — makes a very bad decision to get on a phone with a bunch of bankers and equity analysts and it's recorded and played back to the press. And some of what he says seems to indicate to people that he only cared about their side of the story and not the consumer's side of the story. So he's gone the next day.

 

Raymond L. Gifford:  So let me give my pet theory that you and I have talked about for, again, 20 years. The problem in ERCOT isn't that -- and the problem that was kind of catastrophically expressed here is really an institutional design problem, which is the Texas market was built on the blackboard and works well on a blackboard economic model. But in the real world of politics, and in the real world of price formation, and in the real world where price formation is distorted by any number of things, including tax policy with the production tax credit and the investment tax credit, which gives enormous incentives to build renewables even when prices are negative.

 

      When customers will not abide by price volatility, the likes of which ERCOT relies on for -- as a political matter for that scarcity pricing to persist. You've got a market that was always destined to fail because you're pushing out the high-fixed cost resources through your price system that's not working correctly and doesn't have true prices. And so you are always going to be kind of half-naked when you get these weather tail events. How would you respond to that short version of the critique that this -- it's an institutional regulatory problem and that the planning for capacity was not sufficient? Because it can't be in your model.

 

Barry Smitherman:  I would say that over the last 20 years, 99.9 percent of the time, this worked splendidly. And our late friend, Phil Connor, who used to publish these comparisons of regulated markets versus competitive markets for the Retail Energy Supply Association, last reported [inaudible 21:40] was in 2018 before he passed away where he says that retail prices in Texas have been lower than anywhere else, dramatically lower, and but for competition, they would have been significantly higher.

 

      So the consumer has benefited 99.9 percent of the time because, basically, the generators cannot pass on their cap-ex. They're basically passing on their op-ex only. And then we've got the shale revolution which gave us cheap natural gas prices. Now gas is in a marginal field in ERCOT, so it sets a price for all the other generation resources. So that works.

 

      And I'll say lastly, this is a just-in-time energy market. You and I, we want to build a plant. We want to get into this market and provide electricity and get paid for doing it. We see a price signal. We think it's going to be there again. We got out and build. Hopefully, we build quickly enough so that we get that opportunity in the summer of 2022 or '23, for example. And if we don't, we miss out on the opportunity. If we do, we can hopefully make some money.

 

      But there are times — and we've had -- I think we've had four of them, two winter events and two summer events in 20 years — where extreme weather in February freezes up generation, and we don't have surplus. We don't have some place to reach into the back pocket. And then in the summer, we got those one or two hours one crazy August afternoon. The wind's not blowing. And we don't have enough generation, and that outage lasts for a couple hours.

 

Raymond L. Gifford:  But one of the things you said, Barry, was you don't get your cop-ex, you only get your op-ex. It's even worse than that in a world of the PTC that says build wind to a negative $13.00 a megawatt-hour price, and you're still profitable. If I don't get my cap-ex, that's a one-shot game, right? Which is, my embedded base is going to stay there because that was there before I reformed my market, but why in the world would I enter the Texas generation world where my -- without a renewable play, and that's the only play that looks very attractive because I'm not going to get my cap-ex back.

 

      And if your price system isn't true, and by definition, it isn't true when it's this distorted, and you have other interventions that have to fix the previous price interventions, what you're slowly finding your way back on — and we can talk about the reforms that are coming to the Texas market — is I'll be damned you're planning your capacity needs and your building to it.

 

Barry Smitherman:  Yeah, you made a couple observations. Obviously, we built this market before any PTCs or ITCs. So to the extent the wind is blowing, that pushes out all the other generation resources, and we get out on the really cheap end of the supply curve, and they're not making any money. No question about that, you're right. And as that becomes a bigger and bigger component of our field mix, we've got to understand. We've got to be able to predict it better. We have to back it up somehow. And that is a conversation that's got to be had.

 

      I think a couple of the other things that have complicated this -- and if you remember, during the Obama Administration, I fought hard against the Clean Power Plan because I was afraid that even if there was a price signal, we could not get any new coal plants built. And I think now that's very difficult to do. Then, after Fukushima, as we've seen with the Vogtle plants and other plants in the southeast, it's almost economically impossible to build a nuclear plant in a competitive market. I'd say it basically is impossible.

 

      So what have we left ourselves with: renewables and gas. And those are kind of the only two players, and maybe we get batteries, maybe we get storage. I don't know. But that, I think, calls for us maybe to do an examination of our market. I was hoping the legislature would direct that. I'm not really sure that came out. Having said all that — and I served next to a guy, he used to call our market the greater fool theory — we have still had generators put steel in the ground.

 

      Look at Panda. Panda put two plants in, one in Sherman, one in Temple. They both went bankrupt. They then turned around and sued ERCOT [Laughter]. So again, you know, your reserve margin calculation was wrong, and I spent $1 billion based upon that, those cases have made their way to the Supreme Court. But what is interesting, fascinating, Ray, one of those plants went into bankruptcy, was bought by some other guys, and they ran during the week of the February 15 and made a bunch of money.

 

Raymond L. Gifford:  So what you're saying is, you just need that first set of fools to show up, sink their capital, and go bankrupt [Laughter]. And then, out of the bankruptcy, you get that kind of capital free. Well --

 

Barry Smitherman:  Yeah, you know, it's not a good design to characterize it that way [Laughter]. I'm just telling you what has happened.

 

Raymond L. Gifford:  Sure. Now -- well, let's -- because I know we want to relieve some time for questions here at the end, but there's more of the story, and you know it better than me. So I guess two things if you could both set a -- tell our folks here, as well as describe what's happening.

 

      First of all, I've noticed since I get -- I'm on the ERCOT email list as well -- but this summer, you've all ready had some conservation notices out, and things have been tighter. That, needless to say, I'm sure has all of political and regulatory Texas on tenterhooks for this to happen just months after the last crisis.

 

      And second, the Texas legislature did pass a series of reforms. So I guess two completely separate questions, which is, what are those reforms and what do you think about them? Do you think they'll solve the so-called problem? And second, if you're all ready back in crisis, isn't this a sign of maybe some deeper institutional failures and regulatory failures?

 

Barry Smitherman:  Yeah, it made everybody really nervous when we got these conservation alerts in June because mid-August is our peak. And there was a lot of discontent voiced from a number of different corners. Now, we got through that, and some people have tried to explain it as one big -- I think it was Perish, the biggest coal plant we had was down, so that was a problem. Four or five other plants, I think, maybe, but it was both the brunt of jokes about our market and also deep-seated concern. We'll return to that in a minute.

 

      The legislature did a number of things. One, they completely changed the ERCOT board. Now, it's going to be 11 people, 9 independents. ERCOT was the only board in America that wasn't fully independent, so now it's going to be independent. By the way, these -- 8 of the -- I guess 8 of the 11 are going to be chosen by a sub-committee which is comprised of designees of the governor, lieutenant governor, and the Speaker. So that's an interesting twist.

 

      The ERCOT -- the PUC board will now be five instead of three. And then there were requirements to winterize. We really mean it. If you don't do it, you're going to get in trouble. There was the creation of sort of this mapping of all the state's resources, weather reliability standards put in place, emergency procedures, sort of formalized a new independent organization to inspect the winterization efforts, but there was no fundamental change in the market design. There were a number of securitization bills that were passed to help recovery for munis and co-ops and the gas LDCs, which had to buy gas at crazy high prices during that week.

 

Raymond L. Gifford:  I want to talk about that because we're ticked about that --

 

Barry Smitherman:  Okay.

 

Raymond L. Gifford:  -- around the region [Laughter].

 

Barry Smitherman:  But that's kind of the sweet of things that we got out of the session.

 

Raymond L. Gifford:  I mean, it sounds to me, Barry, that what you -- Flores market folks decided to do legislatively is make the political class more deeply involved in ERCOT governance. Is that fair?

 

Barry Smitherman:  Well, I didn't have a vote on this. I did follow the debate. I mean, I think there are sort of a couple of frames in mind here. One is, people were so angry at ERCOT that everybody that was there had to go. And I think there was some perception that because we had market representatives on the ERCOT board, they were not looking out for Texas. They were looking out for their own companies.

 

      Secondly, I think the political class probably concluded, look, I'm going to get blamed anyway, so I might as well have some say over who I'm going to put in charge because I don’t know any of these people that are over at ERCOT now, particularly the give independent board members that were not from Texas. Just weirdly, that happened. It wasn't by design, but that was a bad, bad optic at that point. So now, the Speaker, lieutenant governor, and governor are, I would say, directly accountable for the actions of ERCOT. The governor's always put the PUC members on, so he has that direct responsibility.

 

Raymond L. Gifford:  Yeah, and that's I think the other danger. And it's not necessarily a danger, it's really kind of the air we breathe, which is -- and it's always been a conversation we've had for a long time, which is the political economy of energy is such — and particularly the political economy of energy after a crisis like this is such — that you're always going to have interventions into any so-called or supposed market process. And planning is going to be inevitable, particularly when we get into a world of more rapid directed de-carbonization, which is part of what the energy policy discussion is about these days.

 

      And if you don't believe in the price system, and you're going to have public policy interventions into your so-called market, your market outcomes are not going to necessarily be true or even beneficial, particularly when the public's appetite for volatility, which I'm sure you know more pointedly than I do living down there in Texas, is quite limited. And if I all of a sudden get a multi-thousand dollar electric bill, I'm going to be mad as hell and take it out on somebody.

 

      Speaking of that, being mad as hell and wanting to take it out on somebody, one of the things that Texas did was cause a cascading price effect in natural gas markets, which hit the adjoining state, and in fact, all the way through the upper mid-west. Where for instance, in Colorado, our utilities had about $1 billion in excess natural gas costs over that weekend. New Mexico had half a billion, same -- you know, lather, rinse, repeat in Arkansas, Louisiana, all the way up through the upper mid-west.

 

      And what that practically means is all of a sudden, customer's gas bills in your neighboring states are billions of dollars higher in the aggregate. I think Oklahoma had to pass securitization legislation to bleed off their gas costs. Now, somebody -- some gas traders got enormously rich in the casino that weekend, and I can tell you that politically we other states are blaming you, Texas.

 

Barry Smitherman:  Well, that's convenient. We are the number one oil and gas state in America, and if Texas were a member of OPEC, I think we'd be number five in terms of oil production. We're certainly the biggest gas producer. If you think some traders were engaging in inappropriate behavior, you should file a lawsuit or take it to the firm.

 

      I don't have any real visibility in this, Ray, but what I do know, in talking to a couple of friends of mine who've sat on the boards of upstream E&P companies out in Midland that -- I mean, it was frozen. The roads were frozen. Everything associated with the wellhead was frozen. There's water -- a lot of this gas has moisture in it, and tank farms were frozen, and because of the bad weather, workers couldn't get out there to unfreeze them. So, I mean, it really was an unprecedented freeze.

 

      Now, if somebody was engaged in some monkey business, they shouldn't be able to get away with that. But there was a supply issue. I know for sure. Now, back to retail consumers, on the electric side in Texas, more retail consumers have a fixed-rate product. So they did not pay the additional cost associated with either high gas prices or higher power prices. There was a small number — I think 30,000 or so — that was on an exotic product which was priced in time of the use. That entity went out of business, and I think the Attorney General got involved and said to those people they didn't have to pay their bills.

 

      So to some degree, if you were on a fixed-rate product, probably even on a fixed-rate gas supply product, you weren't hurt. That's not to say this won't make its way through the system in the future so that somebody feels like they've got to try to charge a higher price, but in a competitive retail market, they can get away with that. I would say this as well, remember that in a vertically integrated market, they come to the PUC with some integrated resource plan.

 

      We want to build these plants, whether it's coal, nuclear, gas. They go off and build them, and they build them in advance of what they think is 30 or 40 or 50 years from now. I mean, those rates get flowed through completely to the consumer, and that is the contrast between our market and that market.

 

      Yes, this was a bad week, no question about it. And I’m going to argue that the PUC made it worse. But in 20 years' worth of having this market, I had estimated that an average consumer had saved thousands of dollars, but all the consumers together — 26 million or whatever they are in Texas — had saved cumulatively $50 billion since restructuring. Now, the irony of that is we may have given it all back in that one week [Laughter].

 

Raymond L. Gifford:  So let me ask this, and then let's go to questions. I know we have a question in the Q and A and one in the Chat. Is the public sentiment and the fallout from this crisis going to strengthen your Texas market or lead to its rapid or gradual disintegration? Because this was not a minor event in Texas or even the region. This was a huge event with depth, economic -- seismic economic consequences, and is at least being portrayed, and I think perceived rightly, as a black eye on the Texas model. So what do you think it means long term?  Will you guys be a little more humble than, you know --

 

[CROSSTALK]

 

Barry Smitherman:  It's hard for a Texan to be --

 

Raymond L. Gifford:  You're known to be protected.

 

Barry Smitherman:  Yeah. I'm nervous. There's a lot of lawsuits -- a lot of lawsuits. Luminant, one of the latest ones to file a lawsuit against the PUC claiming that the PUC's intervention and setting process was a violation of the APA and other regulations, they had reported that they lost $2.3 billion as a result of these actions. San Antonio has sued, Brazos is in bankruptcy, I mean, there's a lot of financial ramifications, and that worries me.

 

      I am especially worried if we have another outage any time soon because I think that the politicians, of which I used to be one — Railroad Commission is an elected position — will feel so much pressure to fix this that they'll try to put the genie back in the bottle. And we'll just go back to a regulated world, which probably has more predictability, less volatility, but it also — I'm going to argue — is more expensive because you pay for the redundancy. You pay for the excess. What I'm trying to figure out -- Ray, what --

 

Raymond L. Gifford:  Well -- yeah.

 

Barry Smitherman:  I'm trying to figure if there's a way to thread the needle so that we can keep our competitive market -- semi-competitive market and have something in the back pocket that we can turn on when we get into an emergency. I don't know if that's an oxymoron or not.

 

Raymond L. Gifford:  Well, it sounds like you're finding your way back toward a more planned system. And I think part of the challenge you have in a world of increasing renewables is you're going to need to have a more planned system given the intermittence of those renewables and the effect on the prices that they're going to kill elsewhere.

 

      Let's go to some questions, Barry. A, this has been a great -- hopefully an informative and interesting conversation for others. It's a continuation of a multi-year conversation between us. First question we got was from Jeffrey Wood saying that he assumes the cold in Texas was anomalous and why is it that it's not a case against insufficient generation, transmission, and distribution, but a case for distributed generation, peak saving fuel cells, and so forth for high criticality high demand users.

 

Barry Smitherman:  Yeah. Great question. I can tell you here at my house, west of Austin, it was five degrees. We had 8 to 10 inches of snow. It looked like Colorado, Ray. And it was that way for a long time. I think in central Texas, 140 hours consecutive below freezing. So yeah, it was unusual. Now, is that the new normal? I don't know. Some people had argued it is.

 

      Great question about, sort of, the other side of the meter distributed generation, microgrids, smart meters, all these kinds of issues. One of the things that is true is the PUC and the legislature has complete control over the wires companies. So they can tell them we want you to really explore fuel cells, batteries, more distributed generation. You've got to figure this out. I don't care what it costs. You've got to figure it out. And they'll go off and do that.

 

      Now, that will end up in rate base, but I think you're going to see that as an avenue. Maybe there are ways to make it easier for a collection of homes in a neighborhood to get off the grid and get paid some money. Or some association to do that voluntarily, and then it'll just avoid a higher electricity bill. They get paid something. I think those are all great ideas. With this sort of interconnectivity that we now have as a society, there ought to be a way that we can connect to all of these disparate — I'll call them the other side of the supply chain resources --

 

[CROSSTALK]

 

Barry Smitherman:  -- and make them available.

 

Raymond L. Gifford:  Well, I'll be puckish here and say it sounds like once again you're slowly finding your way back to a planned utility, Barry, that can bring resources online that may not necessarily be economical in your supposed market.

 

Barry Smitherman:  I'm not --

 

Raymond L. Gifford:  The next question --

 

Barry Smitherman:  I'm not -- I don't know if I'm going to concede that, Ray. But even a --

 

Raymond L. Gifford:  I know you don't [Laughter].

 

Barry Smitherman:  -- formula one car has seatbelts.

 

Raymond L. Gifford:  If you would concede it, it would be the first time. But my point stands is there's a degree of planning in this interconnected system that's inevitable and whether or not -- and I think you can certainly harness certain market structures, and we harness them here in the vertical integrated west. We put generation out to bid. It's just for long-term contracts.

 

      So let's get to a couple more questions. John Melco (sp) asks a couple of questions which is, "Can you address whether any of the legislation that passed addressed designation of gas plants as critical infrastructure that couldn't be cut off? Wasn't a lot of the gas failure due to lack of electricity in compression stations and processing plants?" And then, he asks a follow-up question which is, "If you interconnected ERCOT to neighboring systems, would that have helped? Other than the fact that you probably then become FERC regulated."

 

Barry Smitherman:  I'll take the latter one first. I wonder which PUC Commissioner would be the one to make the decision to give up the independence of the ERCOT grid for interconnectivity with the rest of the country. What a dubious distinction that person would have. Look, other parts of the country failed too. The mayor of Oklahoma City, or Tulsa, was quoted as saying, yeah, we ran out of power too. And we're in a different grid, so it wasn't just the ERCOT grid.

 

      Not only is there what some would see as the upside of being able to move power into ERCOT, but a cascading event outside of ERCOT now could come into ERCOT as well. I think that the folks that have invested hundreds of billions of dollars in the ERCOT market have done so partially under the premise that the independence will remain. And I think they like it that way. The other question was about gas critical infrastructure --

 

Raymond L. Gifford:  Gas as critical infrastructure, yeah.

 

Barry Smitherman:  Yeah. And I think one of the bills requires that now. It was a bit of a chicken and egg because the gas infrastructure was turned off, and it's electric dependent. So it couldn't provide the gas to run the power plants to generate more electricity [Laughter]. So we were in a catch 22.

 

      And I'll say this, my former colleague, Railroad Commissioner, Christi Craddick, really did a good job of pointing this out in her testimony that in some cases, the gas upstream world was doing just fine until it ran out of electricity. And so that I think has been resolved and it -- look, it is totally incumbent on Oncor, CenterPoint, AEP to make sure they know exactly where every critical gas infrastructure element is on the system.

 

Raymond L. Gifford:  Another question here, Barry, and you can take it, and I'll take my shot. Why is nuclear not commercially viable? Although, you do have some nukes in ERCOT.

 

Barry Smitherman:  We do, but they were built back in the '80s, and they were actually built under a regulated paradigm. And why don't you address it? You probably know what's going on in the southeast better than me.

 

Raymond L. Gifford:  Well -- and I think it kind of gets to the -- in the market paradigms, and we've seen this not just in Texas. We've seen it a lot in the PJM Mid-Atlantic region, which is when you are relying on a short-term marginal cost pricing model to clear your generation stack and particularly when you get a lot of new zero marginal cost resources into that, like wind and increasingly solar, the first plants that fail are the plants that have the highest fixed cost. The plants by far with the highest fixed cost are nuclear plants.

 

      And those nuclear plants we've seen fail in Illinois. We've seen them fail in Pennsylvania, in New York, and in each one of those states you had -- and Ohio, yet each one of those states you had interventions by the state to essentially subsidize those nuclear plants so they could stay in the "market" because commercially they just couldn't cover their fixed costs compared to say a zero marginal cost wind or a gas generator that once you buy it its marginal operating cost is relatively low.

 

      So I think it is the case that the only way and the only place where we're going to see nuclear — and we're seeing new nuclear build — is in the vertically integrated states where you can have a regulated model and assure recovery of capital to whoever is building that plant. It also seems to me, for what it's worth — to not turn it into a complete climate change discussion — is if you are serious about decarbonizing the nation's or the world's resource mix, the serious answer, and the viable answer is nuclear. We do have to get the cost down, but we need to -- but right now, that's only going to happen in a regulated paradigm.

 

Barry Smitherman:  Yeah. And I would add, Ray -- and I don't know what the percentage is, but a large percentage of those costs are going to be passed to consumers.

 

Raymond L. Gifford:  Yeah. Well, they are, but Texas — again, as you said — passed those costs to consumers perhaps in one weekend. Next question we have, Barry, is, what about geothermal?

 

Barry Smitherman:  A fascinating question. I'm actually going to be participating in a geothermal conference in September at the University of Texas. The Mitchell Foundation, set up by the late great George Mitchell, who really pioneered fracking, is spending a lot of time and money looking into geothermal opportunities. I'm just learning about it now, Ray. But we're going to try to tease that out.

 

Raymond L. Gifford:  Yeah, I think it's very localized where it's available.

 

Barry Smitherman:  Yeah.

 

Raymond L. Gifford:  I think that the biggest problem is it doesn't scale well, and it's still not very dense, as energy goes. I guess it depends on where you are on the planet and what the geology is, and how under what pressure that stuff is. Either that or we could just go drill a bunch of wells in Yellowstone Park and build the grid out from there radially.

 

      Well, we're coming to the end of our time. And one of the things that Jeffrey Wood says in the comments is a significant portion of nuclear plant's fixed costs are regulatory costs, and that's certainly true. That is, probably again, another institutional failure on our behalf in this country that nuclear has such high regulatory compliance costs that everyone runs from the room screaming if you would propose it.

 

      Any final thoughts here, Barry? And where is the future of both the ERCOT market and U.S. energy policy, maybe generally? And what's our next stupid regulatory failure that you and I, as old men, can complain about from our front porch [Laughter]?

 

Barry Smitherman:  Yeah, right, from the rocking chair on the front porch because we did it so much better back in the day. I think there are a couple of wins that you really can't fight against. One is climate change and ESG. So I think generally, whether it's the big funds or others, trying to ignore that is folly these days. So that's going to shape energy policy going forward. That means we have to figure out how to manage non-dispatchable resources, solar and wind in particular. I think that means a lot more cap-ex in transmission distribution, batteries, fuel cells, maybe even. And it means probably a lot of building of cap-ex across the country.

 

      I think the Obama Administration missed an opportunity and not really supercharging transmission development across the United States because, as you know, the wind blows mainly in the middle part of the country. And if you're going to get it to a coast, where most people live, you're going to have to build a lot of transmission. So are we as a society prepared for that sort of development across the landscape? That's really what is going to be required. I still have faith in our market.

 

      I think -- this is a cautionary tale of irresponsible and a not very thoughtful intervention by the regulators during this week of February 15. Will the market respond in Texas? Will we see some new build? Or will we have another negative event? And if we have another negative event, I'm really worried that it'll be time to, as we used to say, pour water on the campfire and figure out something else.

 

Raymond L. Gifford:  Yeah, and I guess I don't see any of the regulatory or legislative responses to the ERCOT crises as solving them. And in fact -- and you said that. And that's where I think, and what worries me, is you're going to be headed to another crisis, and part of it is because there's some -- at the heart of the model -- when the price system isn't true, and the price system doesn't have integrity, your blackboard model falls apart. That, I think, is the core problem that we have, and this is exacerbated just by the political economy of energy where the political class can't avoid the temptation, and political slash regulatory class can't avoid the temptation to change and alter so-called market outcomes consistent with whatever value there may be at the core of their thinking that day or that month or so forth. So I remain, like a good conservative, a pessimist that these institutions can respond well.

 

      On your transmission point, I think you're right, particularly since we're, as a country, broadly, not just Texas, building more and more intermittent renewables that -- and one of the remarkable stories -- I mean, the fracking revolution's a great story. The declining price of renewables is pretty remarkable in and of itself, despite -- setting aside the tax benefits of it. But I'm also a transmission pessimist for what it is since I sit here in the vast western U.S. with its vast number of federal lands. And as I've said since I became -- entered this regulatory tribe, the place where transmission projects go to die is crossing federal lands where I can keep you tied up in a NEPA lawsuit for a good decade before you put any iron in the ground.

 

      And ironically, one of the first things the new administration that is very transmission gungho did is seek to put the modest NEPA reforms from the previous administration on ice. So you can't both want to build a bunch of transmission but also give blocking position on federal lands to anyone who wants to show up and file a lawsuit. So that's -- I think we're at the end of our time, Barry. But if you have a positive note to end on, you can end my -- you can stop my Debbie Downer close there.

 

Barry Smitherman:  Well, it's always a pleasure to have a conversation with you, Ray. I think our market has produced benefits for our consumers. This week has -- last week really challenged it -- really challenged it. And it may be, not to get on a rabbit trail, that we need a different pricing model during a winter event versus a summer event. So, for example, the price could have gone to $9 million a megawatt-hour, and because everything was frozen, you don't bring on any more generation. So I'm not ready --

 

Raymond L. Gifford:  Right.

 

Barry Smitherman:  -- to throw the baby out with the bathwater. I think we've got to keep refining it. But there may be an argument for another element of regulation either on the demand side or -- I'm not going to say the Warren Buffet plan, which you probably read about, but --

 

Raymond L. Gifford:  I like that plan.

 

Barry Smitherman:  Something in the back pocket that I can pull out in an emergency.  Now, the risk is I reach in the back pocket too often.

 

Raymond L. Gifford:  Right -- right.

 

Barry Smitherman:  And that's the moral hazard.

 

Raymond L. Gifford:  Well, Barry, it's been great to talk to you. As I've said to many people, you were probably one of the best regulators I've known in the last 20 years. It's a credit to Texas. You're a credit to this -- what you've done for your state. And thanks for joining me here today. I'll hand it back over to --

 

Barry Smitherman:  Thank you. You're very kind --

 

Raymond L. Gifford:  -- The Federalist Society.

 

Barry Smitherman:  -- very kind, Ray.

 

Guy DeSanctis:  On behalf of The Federalist Society, I want to thank our experts, Barry Smitherman and Raymond L. Gifford, for the benefit of their valuable time and expertise today. And I want to thank our audience for joining and participating. We also welcome listener feedback by email at [email protected]. As always, keep an eye on our website and your emails for announcements about upcoming Teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.

 

[Music]

 

Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.