Texas-Sized Bills: How Did Customers Get Socked With Huge Charges For Just Five Days of Power?
Power outages and deadly freezing cold temperatures aren’t the only woes for many residents of Texas. Now tens of thousands of them are facing sky-high electrical bills, the payment for which often has been charged against credit cards or already withdrawn from bank accounts. Savings accounts are gone. The government is now demanding freezes on collections. It’s a painful mess.
How could five days of crisis result in such massive bills, some as high as $17,000, just to keep the lights on?
To understand this, we need to go back 22 years to 1999, when Texas passed legislation to deregulate its power grid. Set up in its place was a free-wheeling marketplace of providers where, it was hoped, competition would drive down prices. Much of the impetus behind deregulation was noble: Many truly believed it would reduce the state’s dependence on older, more polluting plants and spur growth in renewable energies such as wind power. But as the current crisis shows, there are costs to lifting nearly all restrictions on how power generator companies and utilities run their businesses and interact with budget-conscious customers.
One problem revealed by the freezing storm was in long-term planning. The multitude of generators and utilities, all competing to offer lower prices to budget-sensitive consumers, discovered there was little financial incentive to invest in weather protection and maintenance. Even though a deep freeze happened as recently as 10 years ago, the likelihood of extreme weather events was never built into infrastructure plans because it would impact short-term profits. Without government regulation requiring investment in infrastructure in order to protect consumers from outages, the power companies did little to nothing to weatherize properly, as they do in colder climates and more regulated states.
But there’s another rather perverse structural problem in the market. Because of the abundance of gas and wind, most independent utilities operate on little to no profit for most of the year and then make nearly all of their money during peaks of very high demand where prices spike. This means that the power generators are actually hoping for hot or cold weather to place strains upon the system through sudden increased demand.
“In the past five years, if generators could get several hours of scarcity in the summer, they were on their way to a good result for the year,” said Nicholas Steckler, a power-markets analyst told Bloomberg. “A lot of generators will make more than a year’s typical revenue just yesterday and today,” he added, referring to February 15 and 16.
Indeed, one power generator’s CFO was practically giddy with the prospects of enormous windfall profits from the crisis. “This week is like hitting the jackpot with some of these incredible prices,” said Roland Burns of Comstock Resources, Inc. “Frankly, we were able to sell at super premium prices for a material amount of production.” (Comstock is owned by Texas billionaire Jerry Jones, who is also the owner of the Dallas Cowboys.)
Customers who receive their utilities directly from wholesalers were not so fortunate. Wholesale prices for next-day delivery of natural gas spiked from $9 per million BTUs the week before the storm to $1,250 at its height according to David Hoy, a trader at Dynasty Power in Calgary. Wholesale electricity prices followed suit, rising over 10,000 percent. The unfortunately-named wholesaler power provider Griddy had to inform its customers that they should switch providers before the bills began to rack up. But many were unable to do so in time, finding the doors at other companies shut to them during the crisis. That’s how RonDeLu Robinson and her husband Doug wound up with a $6,500 bill for just 17 days of power, even after doing their best to conserve power during the storm. She told the Washington Post that her electrical company charged $2,500 of this on her credit card before she could cancel it, and she has no ability to pay the rest.
Help may be on the way from the state or the federal government, both of which have stated their intention that customers not be socked with such large bills. In other words, the government will likely step in to pay the price gouge, leaving the power generators with a windfall. They will do this even as many retail utilities face bankruptcy because they could not charge their fixed-rate customers much higher rates for the power they were paying 10,000% more to buy on the market simply to honor their contractual supply obligations.
California flirted with deregulation back in the 1990s but scaled back considerably after the experiment led to market manipulation, skyrocketing prices and rolling blackouts. It appears Texas is starting to learn the lesson that a wholly unfettered marketplace, where lives literally depend on keeping the lights on, may not be the optimal solution in a world wracked with unpredictable and extreme weather.
Even Texas’s wily politicians appear to sense the shift. After championing the supposed benefits of deregulation in his state for over a decade, Senator Ted Cruz is now blasting the very system he supported. “This is WRONG,” Cruz wrote on Twitter. “No power company should get a windfall because of a natural disaster, and Texans shouldn't get hammered by ridiculous rate increases for last week's energy debacle. State and local regulators should act swiftly to prevent this injustice.”