Andy Liu (HMC ‘23)
The lights first went out three weeks ago, but Texas has suffered from mass utility failure ever since the winter storms of February 10th, 2021. The outages have had a tremendous impact on Texans, leaving five million without power and twelve million without water at their peak. In the political wake of the disaster, local politicians initially blamed the halting of renewable power sources, such as the wind turbines that power ten percent of Texas’s power plants, for the utility failures. However, the reason the utilities failed so drastically, as well as what the future of Texan energy infrastructure, transcends any individual power source, instead stemming from how the deregulated and separated Texan power grid came to be.
Prior to 1935, the regulation of electric power was left to individual states, although the Federal Water Power Act was passed in 1920 in order to regulate the construction of hydroelectric projects. However, this act ushered in a period of rapid consolidation of the electric power industry under a series of interstate holding companies, and it soon became necessary to regulate interstate electrical transmission. Efforts to do so culminated in the 1935 Federal Power Act, which implemented federal oversight of all interstate electrical transmission. Reluctant to accept federal regulation, Texas (which has long been rich in power sources such as natural gas, enabling it to exert more control over its own grid and consume its own power without relying on external supply chains) simply didn’t transmit power to other states, instead sitting out the rapid integration of utility companies into larger networks. While a World War II-era desire to support the war effort essentially led to the intra-Texan integration of the power grid, the now-unified grid in Texas remained independent from the rest of the nation after the war ended. As a result, it also remained independent from the FPA and its regulatory abilities, including the power to set rates for transmission service and wholesale power.
Texan electricity largely remained deregulated until the 1970 formation of the Electric Reliability Council of Texas (ERCOT), created to comply with new national standards imposed after a Northeastern blackout in 1965. While ERCOT was allowed to operate the Texas Interconnection, Texan politicians remained insistent on the state’s freedom from this element of federal regulation. In 1976, this order was challenged by the Central and Southwest Corp, which secretly opened a connection between Texas and Oklahoma in an attempt to connect Texas’s grid to the rest of the United States and invite federal regulation. What became known as “The Midnight Connection” led to a hotly contested legal battle, as Central and Southwest claimed that Texas was now under the jurisdiction of the Federal Power Act due to its grid’s interstate nature. Ultimately, the case was ruled in favor of ERCOT, who were allowed to maintain limited connections to areas outside the state while skirting federal regulations.
It was 1999 that saw an acceleration of the federal government’s trend towards power oversight and Texas’s mirrored drive for deregulation. In response to a wave of increased regulations brought about by corporate resistance to the 1992 Energy Policy Act, state legislators worked to fully deregulate the electricity market. What became known as Senate Bill 7 (SB7), lobbied for by energy corporations such as Enron, eliminated regulated energy rates and monopoly providers while empowering ERCOT to reduce unfair advantages for buyers and sellers. This shifted electricity service to a more retail model, whereby utilities still managed power line infrastructure in their regions, but where consumers could choose from a number of utilities, who themselves contracted electricity from other suppliers, by price (which, critically, was not regulated). By doing so, they intended to expand the number of providers and lower prices. While Texas’s 1999 energy reform was not purely driven by deregulatory forces – it accompanied new legislation requiring utility companies to fulfill renewable energy quotas – it exemplified belief in the power of the market to drive down prices, and a reactionary desire to avoid federal regulation of the power grid.
SB7 brought about drastic changes in the Texas utility landscape, encouraging the proliferation of “retail providers” who could source power from utilities that produced it before reselling to consumers. While dozens of competitors emerged immediately after this deregulation, the industry has been reconsolidated in recent years, with two retail-energy providers accounting for 75% of all retail electricity sold. However, although “traditional” utilities remained cheaper than the nationwide average rate in the past fifteen years, the retail providers’ rates have been 13% higher according to Wall Street Journal analysis, saddling consumers with a net 28 billion USD pricetag. SB7’s proponents argued that deregulation would drive prices down and encourage utility innovation. However, in addition to not resulting in lower prices, the most recent period of deregulation has introduced an unintended reward structure for retail providers. While many consumers had variable-rate plans, where electricity prices varied based on the relative demand, retail providers tended to negotiate fixed rates with wholesale energy suppliers. In addition to protecting providers, but not consumers, from sudden spikes in demand, this separated the incentives for infrastructure repairs such as winterization from the companies actually selling the power generated, leading to rolling blackouts caused by improperly winterized pipelines in a 2011 blizzard.
Still, despite the 2011 storm, and federal regulators urging Texas to winterize their grid in its wake, ERCOT opted to only recommend the adoption of “best practices,” rather than require utilities to prepare their infrastructure for cold weather. While this inspired some changes, which led to improved reliability in 2018 storms, it was ultimately insufficient to handle the 2021 storm, resulting in the entire grid coming “within seconds” of a catastrophic system failure (if demand outpaced available supply) that would’ve led to month-long blackouts. This came from the failure of multiple insufficiently-winterized energy infrastructures, as well as skyrocketing demand due to the cold, ultimately forcing ERCOT to cut the distribution of power to the system. Additionally, because Texas’s electrical grid was mostly separated from the rest of the United States, they were largely unable to receive aid from neighboring states’ grids in the Southwest Power Pool, exacerbating the effects of the storm (although cities that are still connected to interstate grids, such as El Paso, were able to mitigate the effects of the weather). Finally, the lack of ERCOT-imposed pricing controls in the retail market meant that electricity bills for consumers with variable-rate plans were saddled with massive bills due to a spike in demand and lack of regulation.
Throughout the twentieth and early twenty-first century, Texas’s abundance of energy resources (both fossil fuel and renewable) led its legislators to seek security through increased independence and deregulation of Texan power and its associated corporations – even at the expense of the actual customers of such utility companies. But as climate change and its effects on the rate of extreme climate events begin to take their toll, the unique path Texas has forged no longer seems as secure. Regulation, which could take the form of reforms related to grid winterization, maintaining greater reserve margins, or increased accountability for power companies, won’t solve all of Texas’s infrastructure concerns. While its effects were nowhere near as severe, California experienced rolling blackouts last summer operating in a vastly different regulatory environment. However, in an age of increased environmental uncertainty, it’s become apparent that the post-SB7, isolated power infrastructure is no longer enough to assure security in the future. And while Texas has a long tradition of deregulation and asserting energy independence, its growing production of wind energy – which requires more interconnectedness in order to export – combined with growing pressure to reform ERCOT after the winter storm means there could be enough momentum to overturn this in the future.
