A Free-Market Energy Blog

PUCT-ERCOT: A Central Planning Government Agency

By Robert Bradley Jr. -- March 3, 2021

“ERCOT: Texas Was 4 Minutes and 37 Seconds Away From a Blackout That Could Have Lasted Months” (news headline)

ERCOT centrally plans the electrical current of generation, transmission, and substations serving approximately 26 million Texans, 90 percent of the state’s load. (below)

Yesterday’s post documented why the Electric Reliability Council of Texas (ERCOT) is a government agency, not a private-sector institution. Nonprofit status and board “independence” cannot negate this de facto or de jure.

ERCOT, on cue from the Public Utility Commission of Texas (PUCT), centrally plans a huge market. PUCT-ERCOT performs financial functions around the electrical current of generation, transmission, and substations serving approximately 26 million Texans, 90 percent of the state’s load. In terms of size, this composes 81,000 MW of generation (680 units), 46,550 miles of transmission, and 5,000 substations, representing 85 percent of the Texas market.

ERCOT’s Role

Here is the information provided by ERCOT president & CEO Bill Magness on February 24, 2021, “Review of February 2021 Extreme Cold
Weather Event
,” subtitled “Urgent Board of Directors Meeting.”

• Fulfills four responsibilities required by law as the independent organization certified by the PUC (PURA Section 39.151):

‒ Maintain electric system reliability
‒ Facilitate a competitive wholesale market
‒ Ensure open access to transmission
‒ Facilitate a competitive retail market

• Manages the flow of electric power over the bulk power system to approximately 26 million Texas end-use customers.

‒ About 90% of the state’s electric load
‒ Over 680 generation units
‒ Over 46,500 miles of transmission lines

• Must, at all times (24/7/365), balance all consumer demand in the ERCOT region (load) and the power supplied by companies who generate electricity (generation) while maintaining system frequency of 60 Hz.

• Performs financial settlement for the competitive wholesale bulk power market and administers retail switching for nearly 8 million premises in competitive choice areas

[What ERCOT does not do–and what private companies, coops, and munies do]

• Own, operate or have any enforcement authority over any electric generation facilities or any electric transmission or distribution lines or substations.
• Sell or send bills for retail electricity to residences or businesses.
• Control or operate electric service to local areas, neighborhoods or individual premises.
• Establish pricing or rates for retail electric customers.
• Have any direct customer relationships with the public

Significant modifications include:

• Implemented the Seasonal Assessment of Resource Adequacy report that includes an analysis for extreme winter weather.
• Began a resource weatherization process that includes an annual workshop, review of resource weatherization plans and spot checks of facilities.
• Modified the Ancillary Services procurement to allow additional procurement in anticipation of severe weather.
• Established the Gas Electric Working Group and created a notification procedure for QSEs to notify ERCOT if there are anticipated fuel restrictions.
• Modified the survey sent to natural gas generators that collects fuel switching capability for some resources in preparation for each winter season.
• Changed the rules and processes for withdrawing approval of resource outages in anticipation of severe weather.

Planning, Planning

The above description confirms ERCOT as a planning agency within a highly regulated nexus. ERCOT does not set prices, but it follows rules that help plan the power market. It

  • Determines the size of its control area is a planning function–a franchise monopoly of sorts.
  • Sets financial incentives for generation (reliability payments, or not?).
  • Runs a retail market.
  • Integrates intermittent resources (a real no-no for electricity) is planning.

The Free Market, By Contrast

In a free market, private companies would determine what a private ERCOT would do. With profit incentives, and without mandates, electric companies, integrated or not, internally or externally (via contracts), would determine electron control areas.

Prior to the Public Utility Holding Company Act of 1935, “electricity majors” controlled much of the domestic power market. These majors would control ERCOT’s 90 percent share in to-be-determined fashion. These shares might be across state lines or not. Interconnections would be determined by the companies themselves and not based (such as by ERCOT) on jurisdictional issues such as escaping federal control.

“Planning” would be decentralized, and bypass within any territory would be legal so long as contractually permitted. “Wires on a pole” hardly necessitates a “natural monopoly,” and control areas do not constitute a “commons problem” beyond market entrepreneurship.

With ERCOT’s massive failure, the solution is not more regulation, more controls, which could well overcorrect for today’s problems at the expense of captive users.

The choice can and should be regulatory repeal to promote innovation and market discovery. Calling all classical liberals ….

9 Comments


  1. Tom Tanton  

    Rob, minor question. Article says ” [ERCOT does NOT} Own, operate or have any enforcement authority over any electric generation facilities or any electric transmission or distribution lines or substations.” But don’t they ‘enforce’ rules and regulations on the owners of such facilities? Who enforces Texas RPS? Who enforces reliability standards promulgated by NERC?

    Reply

  2. rbradley  

    A key planning decision is explained by Peter van Doren of Cato:

    “The second unique feature of the Texas electricity system is the absence of governmentally imposed generation capacity requirements. In all states, except Texas, the electricity regulatory agencies require generation capacity to exceed peak demand use (in the previous few years) by an arbitrary administratively determined percentage. Instead, Texas relies only on an auction market in which generators offer power and ERCOT accepts bids until supply equals anticipated demand. The highest price offered that clears the market sets the price for all generators.”

    Prices versus reserves–how would a true market decide? Some of both, maybe?

    https://www.cato.org/blog/some-preliminary-thoughts-texas-electricity-meltdown

    Reply

  3. Mike Giberson  

    The Texas RPS is enforced by the Texas PUC. I think the PUC arranged for ERCOT to manages the related bookkeeping.

    NERC reliability standards are enforced ultimately by FERC, given responsibility for reliability in the Energy Policy Act of 2005. FERC designated NERC as the standards development authority and FERC identifies some NERC standards as legally required. The TRE (Texas Reliability Entity) is the NERC region covering the ERCOT footprint.

    Reply

  4. rbradley  

    Michael:

    ERCOT generally does not make reliability payments but depends on going prices as the incentive for reliability.

    1) Is this ERCOT’s decision or another agency?

    2) Depending on price, if a huge escalation occurs at the peak, that brings ‘price gouging’ into play–or to prevent that, ERCOT sets a price limit that creates a shortage.

    In a political setting, the price (‘energy’) approach seems to have shortcomings versus a capacity-payment approach where, from the planners’ view, the peaking price is lower, or at least out of can’t pay, ‘price gouging’ territory.

    Reply

  5. Michael Giberson  

    Rob, the fundamental “energy only” market structure choices were made through political and regulatory processes in the mid to late 1990s. It was, obviously, a political move since it involved changes to heavily regulated industries. There are reliability payments made for reserve capacity within the ERCOT footprint, but almost all of them do not happen through ERCOT.

    Instead, when market participants schedule power to flow on the system (typically purchased in contracts negotiated bilaterally or with the help of brokers), those market participants have to bring along a required amount of reserves with their energy purchase. It’s a requirement that helps ensure that each participant contributes their share to system reliability.

    One could say that there is already a capacity market in ERCOT, its just one that is mostly negotiated bilaterally between buyers and sellers who can decide on mutually favorable deals (fixed price or tied to the real time or day ahead price, fixed amounts or flexible, does buyer or seller take on fuel price risk, etc.).

    In contrast, in ISOs with integrated capacity markets, the contracted product is standardized in ways much more exposed to political and regulatory rent-seeking. See the fight over MOPR in PJM as an example.

    Reply

  6. Michael Giberson  

    The $9,000 price cap did not cause the shortage. External events simultaneously boosted consumer demand and knocked down supply sufficient to ensure that there was not a price that would have physically cleared the market. Sure, in principle, assuming away transaction costs, buyers and sellers could have agreed on a price that would have cleared the market. But transaction costs are significant. Contracts are incomplete and few had prearranged for exactly these severe conditions because very few had anticipated an event this severe.

    Griddy has taken a lot of criticism but after this is over I suspect we will see that Griddy consumers who had access to power were much more likely to have reduced consumption during the emergency.

    It has been speculated that most customers, who have fixed price contracts, actually increased their power consumption dramatically after a period of being blacked out as they tried to overheat their house (recharge their phones, etc.) before the next blackout came. I’m guessing Griddy customers did less of that.

    Reply

  7. rbradley  

    Charles Bayless explains a planning error of ERCOT:

    “Not only did the ERCOT Model fail to address reliability, but the Model also had economic disincentives for reliability.

    Consider a Gas Turbine Power Plant. The operator can purchase gas on the spot market or can buy “firm” gas. Firm Gas gives you higher security of supply, but it also requires you to take the gas when available. As renewable energy grows, electricity prices are dropping. Thus on many days, the difference between the electricity sales price and the cost of generating with firm gas (the “Spark Spread”) is negative, and the unit does not run. If a plant does not run, the producer loses money, but buying firm gas or equipping the plant for reliability would cost even more.”

    https://energycentral.com/c/um/texas-and-missing-markets

    Reply

  8. rbradley  

    Bayless, continuing:

    “To ensure Gas Turbine reliability, an operator needs to keep ten days or so of liquid fuel on site as many New England Units do. Gas Turbines are just large Jet engines, and jet engines run fine every day on liquid fuels, at -600F, and at 40,000 feet. However, an energy market will not incentivize fuel storage as storage would raising operating costs and lower profits.

    The effects of not having a reliability market or regulations were not limited to gas markets or gas units. One South Texas Nuclear Unit tripped when a pressure sensing line for a Feedwater pump failed; wind and coal units were not set up for cold weather operation, and some solar units were snow-covered.”

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  9. rbradley  

    “Many failures contributed to the Blackout, but they all arose from one failure; relying on non-existent markets to provide reliability. If Texans are to have reliability, they must either adopt reliability regulations or set up a reliability market.”

    https://energycentral.com/c/um/texas-and-missing-markets

    Reply

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