Texas lawmakers on Thursday found themselves on the horns of a power market dilemma: expect lawsuits from utilities and traders if they retroactively cut cold-snap electricity prices, or “cascading bankruptcies” if they do not.
The state’s grid operator sharply hiked power prices during a February freeze, pushing two power companies into bankruptcy and prompting others to default on bills. Officials this week called for regulator Public Utility Commission (PUC) of Texas to immediately reduce about $16 billion in power prices.
But PUC Chairman Arthur D’Andrea told lawmakers at a hearing in Austin that any repricing would trigger lawsuits the state could lose. Commodity contracts used to hedge power have closed and any repricing “will have consequences” for the state’s power, agriculture and other markets, he said.
The state independent market adviser testified the PUC can cut spot market prices over the final hours of the crisis and claw back fees for services not provided. The two would eliminate $5.1 billion in costs from those most affected, said adviser Carrie Bivens.
The $16 billion figure was the potential cost of all power sold at a $9,000 per megawatt hour spot price that officials set to induce more generation. However on Thursday, she said the money that changed hands at the high price was much less because some companies had fixed-price contracts or both supply and purchase power.
She said her recommendation for retroactive price cuts during the final 32 hours of that five-day period would save city-owned and other public power providers about $1 billion overall. Failing to do this, Bivens said, would raise “the possibility of cascading bankruptcies,” as unpaid charges are passed to other Texas grid users.
“The groups not able to pay their bills could be helped by correcting the price,” Bivens said, as the $5.1 billion is taken away from power generators that received the elevated prices.
The figures do not include value of power derivatives not visible to the grid operator, said Bivens. Grid rules should be followed even at the risk of disrupting derivatives tied to storm prices, she said.
Intercontinental Exchange Inc (ICE), which handles commodity trading, last week closed contracts covering billions of dollars in Texas power trades that cannot be reopened. ICE deferred settling four contracts tied to service fees that Bivens recommended be cut.
Last week, ICE warned lawmakers “the markets will never be the same” if the government intervenes even once.
Bill Magness, the Texas grid operator’s chief executive, said on Thursday that repricing would hurt the power market. Unpaid charges to those companies defaulting on grid payments could be absorbed by remaining users, he said.
D’Andrea is under pressure to sharply cut the $9,000 per megawatt hour price. Lawmakers probing the financial fallout appeared eager to press him for that change.
Texas officials including 28 of 32 state senators called on the PUC and grid operator to “correct” the final 32 hours of power pricing, citing Bivens recommendation and the impact on public utilities.
“These corrections are squarely within your authority, whether by your own action or an order to ERCOT,” the senators told D’Andrea in a letter on Tuesday, referring to the state grid operator by its acronym.
“I disagree” with the senators’ call, D’Andrea told a committee on Thursday. He has scheduled a PUC meeting on Friday with the power crisis on the agenda.