In February 2021, the Lone Star State’s standalone energy grid buckled under the pressure of unprecedented blizzards. The deregulated Electric Reliability Council of Texas (ERCOT) proved unequal to distributing energy under extreme pressure, resulting in widespread blackouts and wholesale electricity prices going from $25 per megawatt-hour (MWh) to $9,000 per MWh. In June 2023, the Texas Supreme Court revived memories of the storm and courted controversy when it overturned previous rulings and ruled that ERCOT was entitled to the sovereign immunity enjoyed by government actors and thus could not be sued for damages.
This story of ERCOT is a unique case of energy secessionism. Texas’s attempt to maintain its standalone energy grid independent from federal regulations and support is hurting the business and consumers of the Lone Star State. The rest of North America operates under a two-tiered organization consisting of two grids and nine independent system operators (ISOs) and regional transmission organizations (RTOs). These intentionally overlapping jurisdictions with shared infrastructure enable price consistency and energy security but come with federal standards enforced by the Federal Energy Regulatory Commission (FERC).
ERCOT is overseen by a Public Utility Commission (PUC) and the State of Texas. However, without the federal oversight that typically accompanies energy operations of this scale, ERCOT is in a league of its own. Its loose regulatory oversight and dubious “nonprofit” status compelled lower courts to rule that ERCOT was not sufficiently regulated or separate from market dynamics to warrant sovereign immunity. This means that ERCOT cannot be sued by individuals, regardless of their grievance, without the permission of ERCOT itself. In essence, it now enjoys the same protections as any government agency.
Even by its own accounting, ERCOT has conflicting practices and responsibilities that blur the line between a corporation and a utility. It acts as a market participant, seeking to compete with all sorts of newcomers and adversaries, and as a central counterparty for managing wholesale electricity transactions. ERCOT also oversees Congestion Revenue Rights (CRR), which serve as financial instruments allowing market participants to hedge against or profit from congestion costs on transmission lines.
In a State of the Market Report written by independent observers on ERCOT’s practices, it charged that a non-traditional strategy of intentionally withholding or throttling electricity delivery was employed by ERCOT in the latter half of 2021, facilitated by limitations in the transmission system. This self-imposed electricity shortage forced a higher commitment of resources due to Reliability Unit Commitment (RUC) and facilitated the grid’s physical breakdown.
ERCOT also deals with securitization entities, playing a pivotal role in market settlement liabilities. If it continues to enjoy sovereign immunity, this means ERCOT is in the position of being able to de-facto regulate the electricity market while declining any appeals on its decisions.
It is unsurprising that amid juggling so many usually demarcated roles, ERCOT dropped the ball.
Energy secessionism, for its own sake, is counterproductive. It creates a situation of limited oversight susceptible to capture by private interests, inefficiencies, and grid insecurity. Nevertheless, maintaining an independent grid and dodging the interstate commerce regulations that govern the rest of the country’s grids isn’t necessarily the problem. It allows Texas to experiment with innovative technology (as it did with AI at Martin Lake Power Plant), avoid external energy outages which could hurt Texas’ energy supply, and generally provide cheaper electricitycompared to similar markets. This independence also does not necessarily mean being disconnected from neighboring grids. ERCOT does maintain minimal connections with Mexico and the eastern U.S. grid.
The downside, as repeatedly evidenced by not just the historic 2021 blackout but also a large blackout in 2011, remains the system’s physical security and the customer’s financial stability.
Sometimes, customers may pay less for electricity, but there is a disastrous lack of security. In 2022 more Texans (per capita) suffered power outages than any other state, almost 50% higher than the runner-up. It had the highest price volatility of any state and ranked 48th in terms of efficiency in energy use. If not rectified, this will have devastating consequences for consumers and businesses, most of which could be rectified by simply increasing interoperability with neighboring grids and decreasing ERCOT’s financial mission creep.
Rarely in American history has the judiciary faced such a broad legitimacy crisis as it does now. The Texas Supreme Court ruling threatens to erode this legitimacy even further and damage electricity as a reliable economic commodity.
An entity operating a de-facto for-profit enterprise should be subject to damages and liabilities under the applicable law. An entity operating as a utility providing an economic service should not be throttling access to electricity, profiting off financial speculation, or drastically increasing rates during a crisis. This is a common sense, non-partisan position that courts may take into account when the current ruling is inevitably appealed.
Read the full article here