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After all, what’s $29 billion between friends?

Tom Alrich's picture
Supply chain Cyber Risk management - emphasis on SBOMs and VEX documents Tom Alrich LLC

I provide consulting services in supply chain cybersecurity risk management and am now primarily focused on software bills of materials (SBOMs) and VEX (Vulnerability Exploitability eXchange). I...

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  • Mar 8, 2021

It now looks like the financial storm that resulted from the meteorological storm in Texas three weeks ago has turned into an absolutely huge cluster you-know-what. For those of you who aren’t keeping score at home, here’s my take on the situation. You might want to read my previous post on this subject, since I’m building on what I said there.

1.      The bitter cold that came to Texas over the Valentine’s Day weekend caused a perfect financial storm: Demand for electric power soared because most people in Texas heat their homes with electricity, while at the same time supply was severely constrained because so much generation was put out of service.

2.      Monday, Feb. 15 was the Day from Hell in which ERCOT, the Texas grid operator, had to order large-scale outages in order to keep the system from being completely overwhelmed (which would have resulted in long-term damage to a lot of big generation – meaning probably many months of outages after that).

3.      At the same time, the wholesale market price for power jumped from its normal level of around $20 per megawatt-hour to $1,200 per MWH. That alone was pretty bad. Unless you compare it to what happened next.

4.      The Texas Public Utility Commission was meeting at the same time. Being all very knowledgeable about the basic principles of microeconomics (although not much more than that, it seems), they concluded that the fact that the market price was “only” $1,200 – while at the same time a lot of people were sitting in cold homes and couldn’t get power no matter how much they would have been willing to pay – meant only one thing: The price was being artificially constrained by the fact that so much demand was being curtailed (load was being shed, in power industry terms). They decided the best thing they could do would be to raise the maximum price to $9,000 (the highest price allowable) – a more than seven-fold increase.

5.      And they were absolutely right – at least as far as their Microeconomics 101 course went. If not all demand is being satisfied (i.e. some people can’t buy the commodity at any price), this normally means that the true market price is higher than the apparent market price (namely, the $1200 price at the time). The way you clear the market in such a situation, according to a highly simplified view of microeconomics, is you allow the price to rise to the level at which quantity demanded will fall, because people decide they don’t need the commodity badly enough to pay the higher price. At the same time, quantity supplied will increase, because suppliers who didn’t think they could make money at the old price realize that they can at the new price. Quantity supplied will equal quantity demanded, markets will clear, and we’ll all live happily ever after.

6.      Unfortunately, those PUC members never took Micro 102. If they’d done that, they might have learned:

a.      When supply is constrained by non-economic factors (such as the effect of cold weather on generation facilities which aren’t prepared for it), it doesn’t matter how high you make the price – you’re not going to get any more supply. That was certainly the case in Texas on Feb. 15.

b.      The end consumers of electric power (i.e. Joe and Jane Consumer) would never be willing to pay the $1,000+/day prices that would have been required to clear the market anyway. My guess is even at $300/day, most consumers would prefer to endure some cold, rather than start to cut into their life savings. In other words, the $1200 price was probably pretty close to the true market price. It was certainly a lot closer than $9,000 was.

7.      So the PUC was clearly wrong in basing their decision to raise the price on the fact that ERCOT had ordered so much demand to be curtailed. But anyone with half a brain (a commodity evidently in short supply at that time and place) should have at least realized that the rationale for that high price would go away once the curtailments ended. On the 18th (Thursday), ERCOT stopped ordering curtailments (although because a number of utilities were still struggling to meet demand, there were still lots of people without power). Yet they didn’t lower the price by a nickel until Friday, even though the market price returned to normal by Thursday. To quote a Wall Street Journal article from March 4, “On Feb. 18 at 5:30 p.m., for instance, the market price of electricity was $22 per megawatt hour—and the utility commission’s additional price on top of the real-time market price, as imposed by Ercot, was $8,979 per hour.”

8.      So the good news is that by Thursday, ERCOT was no longer imposing a price that was seven times the market price. The bad news is that they were imposing a price that was 409 times the market price. In other words, they made the PUC’s original decision much worse than it already was.

9.      Let’s fast forward to last Thursday morning. The WSJ, in the article I just linked, pointed out that a market monitor who had been hired by the PUC said that the market price should have been restored – according to the PUC’s rules - on Thursday, when ERCOT stopped ordering curtailments. The Financial Times also had a good article that touched on other aspects of this story (thanks to my college roommate Dave Reed for forwarding me that link). That was 33 hours before the market price was actually restored. They said that the $16 billion surplus in receipts that was generated (pun intended) during those 33 hours should be returned to the entities that paid it (and ultimately, hopefully, to the end consumers whose huge bills funded it).

10.   The tone of both the WSJ and FT articles was something like “Here’s a sensible proposal that won’t make everything right, but it will at least help some of the victims of this mess.” Neither article quoted anybody who didn’t believe that the PUC would take their advice and order the $16 billion to be refunded.

11.   So I was very surprised to read in the WSJ on Saturday morning that, while the PUC (now down to just two members, since the chairwoman resigned two weeks ago, and deservedly so. The ERCOT CEO was fired last week, although he’s still on the job for 60 days) hadn’t made a final decision on this idea, they’re currently very much leaning against it. The new chairman worded their reasoning very succinctly: “It is impossible to unscramble this sort of egg”.

12.   And indeed he’s right. This isn’t a case of having a bunch of suppliers on one side, who are sitting on this huge hoard of accounts receivable, and a vast, unwashed (since they haven’t been able to take showers because their pipes broke) mass of consumers on the other side, who are facing huge bills. Instead, there are all sorts of nuances to the story. Here are a few:

a.      A lot of power suppliers are themselves the biggest victims. That’s because they were under contract to deliver power during the crisis, but since their plants (or wind turbines) weren’t operational, they had to go to the spot market for their obligations – meaning they were paying $9,000/MWH for the power they were delivering, vs. earning maybe $25/MWH in normal times. The big power producer Vistra said they lost over $1 billion in the crisis. Exelon’s generation arm lost more than $500 million; Exelon then decided to pull out of the Texas market altogether. And Brazos electric cooperative, the largest cooperative in Texas, declared bankruptcy two weeks ago, because they had to pay such high prices to deliver on their obligations to their customers (who are also their members).

b.      Prices in the natural gas market also spiked by huge amounts during the crisis. As in the power market itself, this was due both to supply constraints (most gas wellheads were no better protected against the cold weather than the power plants were. And because it’s usually not necessary, gas pipeline companies in Texas don’t normally take all of the moisture out of the gas before putting it in the pipe, as happens in colder climes. Thus, many of the gas pipelines froze), and to demand spiking (because the gas generation plants that were still working were demanding as much gas as possible, as their owners tried to make all the hay they could while the sun shone). But this meant that a gas plant owner who was being paid an astronomical price for the power they were producing was also paying an astronomical price for the gas they used to produce that power. So if just the power price was rolled back but not the gas price, they would be in a deep financial hole.

c.      Large purchasers of power (manufacturing plants, utilities that don’t generate the power they distribute, municipal utilities that don’t generate much if any power themselves, etc) will often (or even usually) hedge their purchases on the futures market – meaning they essentially buy the power they will need in advance at an agreed price (and it’s certain that the futures price, since it was probably set months ago, was much closer to $20/MWH than $9,000). So the big bills those purchasers received a couple weeks ago would be paid by the speculators on the other side of the contract; those purchasers just had to pay the much lower cost of the contract.[i]

d.      On the other hand, the speculators would have lost a ton of money. Normally, they would just blame themselves for the losses, since obviously when you play that game you have to be prepared to lose as well as win. However, if some of the charges get reversed as suggested, it’s just about certain that the speculators are going to want some of that for themselves. And it’s likely that the power futures exchanges (the largest of which by far is the Intercontinental Exchange in Chicago) have rules allowing those funds to be recouped from the buyers of the contracts.

e.      But the problem is that the large purchasers who bought futures contracts wouldn’t receive any funds if ERCOT ordered the power producers to cancel their big bills to consumers; they just wouldn’t have to pay more than the price of the futures contracts they bought. Yet now they would be hit with an order from the futures exchange to reimburse the speculators. They might in turn go to the power producers for reimbursement, but the producers will likely argue that, since they’ve been ordered to return whatever payments they received at the high rate, they certainly shouldn’t be ordered to reimburse their customers for the fact that they hedged their purchases.

f.       In other words, it’s likely the large purchasers will be caught in a really tough legal fight with the futures exchanges, of which the outcome will be far from certain.

And that last statement pretty well sums up the electric power forecast for Texas in the coming years: Massive lawsuits and political fights. Ultimately, I’m guessing there will be some sort of huge settlement that won’t make anybody whole, but will put most of the cost on – you guessed it – Texas citizens, in the form of higher taxes and high power bills. I certainly hope they’ll decide that changes need to be made to keep this from happening again.

One other thing: You may have noticed the title of this post refers to $29 billion, but the amount that is being talked about for a refund is $16 billion. The market monitor decided that the original PUC decision to raise the maximum rate to $9,000/MWH was made according to the PUC’s rules, and continued to be so until Thursday, when the fact that ERCOT ended demand curtailments meant the price should have reverted to the market price of about $22/MWH (Note: The fact that the PUC had to pay somebody to point this out to them is incredible in itself). The $16 billion is just the extra cost for 33 hours from Thursday into Friday.

But as I hope I’ve shown, if the PUC had just applied some common sense on Monday the 15th, they would have realized there was no case for trying to make the rate go higher than the market rate, which at $1,200 was certainly high enough to induce whatever remaining supply might have been sitting on the sidelines. I read somewhere that, over the entire Monday-Friday period, the difference between the actual price ($9,000) and the market price led to $29 billion in unnecessary charges (i.e. if the PUC had just left the actual price at the market price, power purchasers would have saved $29 billion compared to the bills they actually received).

Given the recklessness and incompetence that the PUC exhibited in boosting the price far higher than what the market said it should be on Monday, and the terminal cluelessness exhibited by ERCOT in keeping the actual price at that level through Friday (remember, the $9,000 was the maximum allowed. The PUC didn’t order ERCOT to set the price at that level. I doubt they had that power, anyway), I think the entire $29 billion should be reversed. Of course, that makes a huge legal mess even worse. But expecting some power buyers to simply eat the $13 billion unjustified extra cost for Monday-Thursday isn’t exactly a solution, either. Get everything on the table and treat everyone equally poorly. And remember the people who got you into this mess the next time you go to the polls.

Any opinions expressed in this blog post are strictly mine and are not necessarily shared by any of the clients of Tom Alrich LLC. If you would like to comment on what you have read here, I would love to hear from you. Please email me at

[i] This assumes the purchasers were 100% hedged, meaning they’d bought futures contracts covering their entire needs. Since that’s not the usual practice (after all, there’s certainly a cost associated with buying futures contracts), these purchasers almost certainly faced large power tabs for the week of Feb. 14; but those were much lower than they would have been if they hadn’t hedged at all.

Matt Chester's picture
Matt Chester on Mar 8, 2021

The new chairman worded their reasoning very succinctly: “It is impossible to unscramble this sort of egg”.

This is really emblematic of the attitude-- hard to see her reversing course. Wonder what that will mean moving forward..

Tom Alrich's picture
Tom Alrich on Mar 8, 2021

Chaos, dissension, recriminations, bankruptcies, lawsuits, people (deservedly) losing elections, maybe a few suicides. Other than that, I don't think it will be very impactful...

Bob Meinetz's picture
Bob Meinetz on Mar 8, 2021

Excellent analysis Tom, except I was hoping you might breach the subject of whether electricity shouldn't be re-regulated by the Securities and Exchange Commission.

Considered by most an essential human right, like that to clean water, sanitation, or clean air, somehow we've seen fit to set corporate interests free to ravage captive electricity consumers (in not one location in the U.S. is grid electricity not a monopoly, despite protests to the contrary).

Shall we privatize public water too? We could permit Community Choice Aggregators to sell the same city water customers would get anyway, but with enhanced branding - "East Bay Artesian Water", or "100% Oakland Glacier Water", etc. Maybe allow customers with private cisterns on their roofs to contribute rain water, while forcing other customers to pay them retail, "net-metered" rates - and assume there will never be a drought. What could possibly go wrong?

IMO, the problem isn't nearly as complicated as it's believed to be: dust off the Sherman Antitrust Act and bring the hammer down. Sure, re-regulating electricity would be expensive, but not $29-billion-per-state expensive.

Tom Alrich's picture
Tom Alrich on Mar 10, 2021

Thanks, Bob. I'm going to discuss the question of regulation in a new post soon. However, I can assure you that SEC has never regulated electric power, and never will. Neither will the FDA.

Bob Meinetz's picture
Bob Meinetz on Mar 11, 2021

"However, I can assure you that SEC has never regulated electric power, and never will."

That's incorrect, Tom. For seventy years the Securities and Exchange Commission enforced terms of the Public Utilities Holding Company Act of 1935 (PUHCA), which prohibited, among other practices, vertically-integrated utility holding companies from engaging in 'affiliate transactions', for the purpose of exploiting electricity ratepayers.

Even before the Act was repealed in 2005, exemptions from PUHCA were blamed for the California Electricity Crisis of 2000-01.

Since you're going to be discussing the question of regulation in a new post soon, you might want to learn a little more about it first. 

Robert Borlick's picture
Robert Borlick on Mar 11, 2021

This article is confusing and contains a number of errors.  

Firstly, the four largest Retail Electricity Suppliers deliver around 70 percent of the electricity and they are owned by parent companies that also own most of the generation.  These REPs contract with their affiliate generators to hedge themselves against wholesale market volatility. Thus, only a small portion of their forecasted sales are unhedged and were subjected to the $9,000 spot price.  However, a lot of customer load was interrupted which may have reduced or even totally eliminated, the unhedged positions of many REPs.  So the end result is that only a fraction of the $16 billion (and $29 billion) was effectively paid by the REPs or their retail customers because the generators under contract had to refund the revenues to the REPs which which they contracted.  My guess is that s small fraction of the hedges actually were done through ICE or the other exchanges.  

Secondly, stating that $1200 per MWh would have brought forth and retained the same amount of generation as the $9,000 price did is almost certainly not so because generators buying natural gas off the spot market were paying prices that were causing their cost of production to far exceed $1200 per MWh!  The spot price for natural gas delivered to the Houston Ship Channel soared to around $400 per Million BTU.  That roughly translates into $2,800 per MWh for a very efficient combined cycle plant but can be as high as  $4,000 plus for an old combustion turbine or steam plant.  Some generators (e.g., the CEO mod Vistra) stated that they chose to operate at a loss to serve the public good - but certainly not all of them.

Thirdly, the PUCT was right in escalating the price to the cap early on.  Load was being shed in a "lumpy" fashion.  Immediately following a lumpy load reduction the ERCOT software would see sufficient supply to serve the connected load and would immediately reduce  the scarcity adder for the next 5-minute dispatch interval.  The problem is that the software doesn't know that demand has been constrained by disconnecting customers.  The principles of economics work when all of the producers and suppliers are in the market and see the same price signals. This raises another flaw in the ERCOT market design: very few customers actually are exposed to the ERCOT market prices, thus have no incentive to respond to them.  If all of the small customers had been on Griddy the ERCOT market prices would not have reached the $9,000 cap because the customers would have furiously reduced their usage when the price reached $1200.  One Griddy customer reported cutting its usage in half while still maintaining an interior temperature of 67 degrees;

 Without a detailed audit of the various contractual arrangements there is no way to even guess at who is on the hook for how much so the bombast contained in this article is uninformed and uncalled for. 

Tom Alrich's picture
Tom Alrich on Mar 13, 2021

Thanks for your comment, Robert. I'll link to this discussion in my next post on Texas. However, please remember that the point of my post (and the one before it) was to point out how messed-up the deregulation system is in Texas. The fact that the total overpayments won't amount to $29 billion doesn't change the fact that this situation wouldn't have happened in a well-designed deregulation system. Other states are deregulated and can handle both summer and winter peaks with ease.

As you point out in your last sentence, only a very detailed audit of all the transactions will get to the bottom of how much the overpayments were, and who in fact received them. This will of course take years to accomplish, and in many cases (probably most), there will be no legal way for those who in fact unfairly paid for the overcharges to recoup their losses. The Lt. Governor's assertion that people who paid too much "should have read the fine print" isn't exactly a solution to the problem, except in a very strictly legal sense. 

I do want to point out two other things. First, your point that a very large portion of the overcharges were in fact captured by the gas producers and distributors just points out another serious deficiency of the deregulation system: It didn't take account of the fact that a serious winter event would also affect gas production, meaning not only generators should have been required to winterize, but gas wellheads and pipelines as well. 

Second, it's absolutely true that a lot of (and perhaps all) power consumers  would have reduced their usage if they'd known the price they would actually be charged. And this again is a big problem with the deregulation system - it placed great faith in the idea that a sharp price increase would bring forth both an immediate surge in supply and a precipitous fall in demand. Neither one happened.

Bob Meinetz's picture
Bob Meinetz on Mar 18, 2021

"I do want to point out two other things. First, your point that a very large portion of the overcharges were in fact captured by the gas producers and distributors just points out another serious deficiency of the deregulation system: It didn't take account of the fact that a serious winter event would also affect gas production, meaning not only generators should have been required to winterize, but gas wellheads and pipelines as well."

Tom, I understand the points you make but it seems there's a fundamental one that's been overlooked.

Whatever someone thinks of Milton Friedman's outlook on how economics should function, his theory of how they do function is undeniable, and was a breakthrough in modern economics. From what I understand (correct me if I'm wrong), Friedman would look at utilities today and say,

"A free market requires freedom of choice. When utility customers don't have freedom of choice [none in the U.S. do], the vendor is a natural monopoly, and there is no 'market' in electricity."

"That continues up the supply chain. There's no market available to a utility that must purchase electricity from the generator with the lowest price, or with a specified 'loading order' [like California]. And there's no assurance the unregulated supplier of the generator's fuel isn't a subsidiary of the utility - that buyer, seller, and supplier aren't one and the same!

"For end consumers [Friedman might continue], having an option to buy or not from a single provider does not a market make, either - especially when the good being sold is a fundamental need, one essential for the customer's well-being. He's as much a market buyer as the man at the end of a robber's gun, who is told 'Give me your wallet, or else!' Who would consider 'life or death' to be a matter of free choice?"

That ERCOT presents consumers with any kind of functional market in electricity is a grotesque fraud - and re-regulation, the only viable option (the problem of Texas's "de-regulatory system" is one shared by all).

Robert Borlick's picture
Robert Borlick on Mar 19, 2021

Well Bob,

As an admirer of Milton Friedman, surely you know that his basic thesis, (elucidated in "Capitalism and Freedom") was that markets are preferable to government fiat.  Yet you want to replace the Texas model, which gives retail customers the freedom to choose their competitive suppliers, and replace it with quasi-governmental regulators that determine the price of electricity and load it down with subsidies to fund their favorite social causes.  

Whether you accept the fact - or not - ERCOT administers a competitive market for energy and reserves.  No, it is not a co-location of buyers and sellers separately engaging in bilateral transactions.  That model is unworkable because power systems are complex machines with numerous operating constraints that cannot be violated.  In ERCOT (and elsewhere) the transmission and distribution networkst are natural monopolies, not the generators. or the entities that sell electricity to consumers.  

Texas electricity consumers DO have a choice.and some made bad ones.  Just ask the Griddy customers.   But then freedom of choice allows people to make their own mistakes in the ways they want.

I think Milton would approve.  

Bob Meinetz's picture
Bob Meinetz on Mar 19, 2021

Robert, I would agree with Friedman's belief that markets are preferable to government fiat. But Friedman exalted on the power of choice - he believed it to be a key component of any functional market - and would laugh at the idea Texas's convoluted construction represents a free market.

For example:

Do you have multiple wires connecting your home to different electricity providers? Of course not, your ERCOT Transmission and Delivery Service Provider (TDSP) is a monopoly (strike one). Is someone switching wires at the other end, to a utility of your choice? Of course not, your Texas Electric Utility (TEU), one of five, is a monopoly as well (strike two).

You pay your electricity bill to a retail electricity provider (REP), who supposedly buys the kind of electricity you want (green, red, orange) than sends you a bill based on how much electricity shows up on your meter, as metered by your TEU.

Say your neighbor has chosen an REP's Red plan, and you've chosen another REP's Green plan. You're paying more, but it's helping the environment, isn't it? Ostensibly, you're paying your retailer more to purchase contracts from green generators, when it's available, and when it's not available they buy credits, from other generators, who are ostensibly generating clean electricity. But in fact, you're both getting exactly the same electricity, as is everyone on the same TDSP (a fact of physics, and strike three).

You see where I'm going with this: your only judgement of quality of your electricity is based on marketing that's impossible to verify. In Texas sales of electricity is nontransparent, and without the ability of customers to accurately judge the value of a purchase, a free market cannot exist.

"Texas electricity consumers DO have a choice.and some made bad ones.  Just ask the Griddy customers."

GRIDDY customers only made a bad choice because they trusted regulators to operate a well-functioning, efficient free market in electricity, and it can't be done. That's something regulators recognized ninety years ago, but is another lesson of history we're apparently doomed to repeat.

Tom Alrich's picture
Tom Alrich on Mar 13, 2021

You're correct, Bob, in that I didn't know about the SEC enforcing the PUHCA - but the real regulator of wholesale power markets is FERC, and that's not going to change. And remember, the SEC only has jurisdiction over the 35 investor-owned utility organizations (and just the publicly traded IOUs, as far as I know). There are thousands of municipals and coops that they have no authority over.

Moreover, you're wrong in your implication that improper enforcement of the PUHCA had anything to do with the Texas overcharges. In Texas, as well as in every other state that I know of with deregulated generation, the utilities are allowed to own generation, but they have to treat it in a completely stand-off manner. They have to buy their power from the lowest priced source (usually in an auction), and they can't favor their own subsidiary over any other generator who offers a lower price.

Bob Meinetz's picture
Bob Meinetz on Mar 13, 2021

Since 2005 the SEC has no jurisdiction over public utilties (above and beyond standard antitrust issues common to every U.S. corporation) so no - it wouldn't have anything to do with Texas.

My point was that maybe it should. FERC doesn't have the resources (one-fourth of SEC's employees), the expertise, nor the authority to audit the books of multi-state electricity holding companies.

"the utilities are allowed to own generation, but they have to treat it in a completely stand-off manner."

Enforcement is the issue. For example: say an energy holding company owns a utility, a generating subsidiary that offers gas-fired power at auction, and a gas subsidiary. The generator offers power at a ridiculously low price and wins the auction, but then buys gas from the (unregulated) gas subsidiary at a ridiculously high price - and passes its cost through to customers. Just one example of the games that were being played to exploit ratepayers one hundred years ago, and are being played again today.

With PUHCA, FDR's administration decided utilities had to play by different rules. It not only prohibited any company from owning both electricity and gas subsidiaries - it prohibited any company whose primary business was unrelated (mortgage banks, real estate services, etc) from selling electricity!

Without PUHCA, utility electricity is once again the Wild West, and the only safe bet is that electricity prices will continue to rise until the sheriff's back in town.

Tom Alrich's picture
Tom Alrich on Mar 15, 2021

If you have any examples of when this has happened, Bob, let me know. I have never heard of one, nor do I understand how an integrated power subsidiary of a regulated utility would even be allowed to bid in a power auction in the first place.

And this definitely doesn't apply to Texas, since neither of the two large IOUs in ERCOT - Oncor and Centerpoint - does any generation at all. They just transmit and distribute power.

Bob Meinetz's picture
Bob Meinetz on Mar 15, 2021

Oncor may just distribute power, but the company itself is a subsidiary, owned by Energy Future Holdings, Sempra Energy, and Energy Future Intermediate Holding CO LLC.

Food for thought: when Sempra subsidary San Diego Gas & Electric (SDG&E) wants to buy some gas to generate electricity, do they buy it from Sempra subsidiary Southern California Gas Co. at a ridiculously-high price, then does SDG&E pass the cost through to San Diego electricity consumers? Could that be the reason SDG&E has the highest residential rates of any utility in the continental U.S.?

I don't know, and you don't know. In truth, the only people who may know are in Sempra's boardroom. If you've ever tried to decipher the 5+ pages of deliberately-obscured legalese in Sempra's annual S-1 filing, you would know its affiliate transactions have been studiously rendered un-knowable.

Centerpoint doesn't do any generation? What about its 7 subsidiaries:

  1. Utility Holding, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of CenterPoint Energy, Inc.
  2. CenterPoint Energy Investment Management, Inc., a Delaware corporation and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
  3. CenterPoint Energy Resources Corp., a Delaware corporation and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
  4. CenterPoint Energy Houston Electric, LLC, a Texas limited liability company and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
  5. CenterPoint Energy Services, Inc., a Delaware corporation and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
  6. CenterPoint Energy Gas Transmission Company, a Delaware corporation and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.
  7. CenterPoint Energy Field Services, Inc., a Delaware corporation and an indirect wholly owned subsidiary of CenterPoint Energy, Inc.

And to think it was only 16 years ago when gas and electricity companies couldn't be owned by the same multi-state energy holding company...time flies!

Robert Borlick's picture
Robert Borlick on Mar 23, 2021

Bob, you said:

"The generator offers power at a ridiculously low price and wins the auction, but then buys gas from the (unregulated) gas subsidiary at a ridiculously high price - and passes its cost through to customers." 

That can't happen in the ERCOT market.  Regardless of what price a generator pays for natural gas it only gets paid the price it offered in the auction (i.e., the real time energy market).  And there is no need for a regulator to even get involved because the ERCOT market rules control what generators get paid.  Incidentally, this is true in all of the ISO markets including the California ISO.

However, there is a case to be made for prohibiting parent companies from owning both generation, retail suppliers and distribution utilities.  During the polar vortex many retail suppliers were caught without fully hedging their retail sales with fixed price contracts for energy.  That meant they had to buy energy at $9,000 per MWh to supply their unhedged sales at the low fixed prices in their contracts with customers, e.g., around $50 per MWh. 

However, many suppliers were spared huge losses because their customer loads were reduced through load shedding.  Who selected the customers to be disconnected? The distribution utilities, e.g., Centerpoint and Oncor.  Now what would prevent a distribution utility from selectively disconnecting the customers served by its affiliate  retail suppliers?  

I have no evidence suggesting that happened but it could.  

Tom Alrich's picture
Tom Alrich on Mar 16, 2021

Bob, to reply to your 3/15 comment, both power and gas utilities are highly regulated by the PUCs. They can scrutinize every transaction, and should investigate anything that's suspicious. I would imagine they publish lots of data on these transactions. You can satisfy your suspicions by digging through that data. The fact that a utility owns an unregulated subsidiary that produces power or gas doesn't mean anything - it's only if the PUC lets them get away with transactions with those subsidiaries that there's a problem. I suspect you'll find very few or even any of these, when you go check.

Robert Borlick's picture
Robert Borlick on Mar 16, 2021

Tom, your point is well taken regarding the scrutiny of PUCs over jointly-owned electric and gas subsidiaries, except for Texas.  

In Texas the PUCT only has jurisdiction over the electricity market and the the Texas Railroad Commission has jurisdiction over the oil and natural gas markets.  It has been said that the Railroad Commission's regulation is "light-handed," a euphemism for essentially nonexistent.  


Bob Meinetz's picture
Bob Meinetz on Mar 16, 2021

Robert, you might be surprised. Even if they're not complicit, PUCs nationwide are notoriously understaffed.

Anyone who believes a holding company with $20 billion in annual revenue doesn't have the resources to successfully conceal affiliate transactions, among scores of subsidiaries, and subsidiaries of subsidiaries, needs to take a closer look.

When Utility Gas Affiliates Play by Monopoly Rules, Consumers Are Likely to Lose

Bob Meinetz's picture
Bob Meinetz on Mar 16, 2021

Tom thanks, but I've done quite a bit of checking on that subject, and found many examples of PUCs cooperating with utilities to defraud ratepayers. The data through which I've dug only serves to confirm my suspicions.

It was no accident PUHCA put a federal agency in charge of oversight - the very same conflicts of interest were rampant in pre-regulatory 1920s electricity. State PUCs remain rife with conflicts of interest and corruption.

To wit: In 2013, the president of California's PUC, Michael Peevey, worked out a secret deal for the shutdown of San Onofre Nuclear Generating Station with a Vice President of Southern California Edison. Peevey just happened to be a former CEO of the utility - and the deal guaranteed $25 million to UCLA's Center for the Environment and Sustainability if they promised to start publishing anti-nuclear research:

"The PUC announced Monday that it is reopening the deal that its former president, Michael Peevey, privately negotiated in 2013 with a Southern California Edison executive, mostly during a 2013 meeting in Warsaw's Hotel Bristol.

As part of the $4.7 billion settlement, which would cost ratepayers an estimated $3.3 billion, SCE donated $25 million to a Peevey-sponsored UCLA climate change research project."

I'm sure Peevey "scrutinized every transaction", alright - to be sure California gas interests would be able to soak California ratepayers for every dime they possibly could.

Tom Alrich's picture
Tom Alrich on Mar 17, 2021

Bob, I'm not saying PUCs are perfect. I'm saying I've never heard of any case where a public utility was accused of buying power from their regulated subsidiary. Do you know of any such case?

And this story about San Onofre was all over the news a few years ago.

Bob Meinetz's picture
Bob Meinetz on Mar 17, 2021

Energy analyst Richard McCann:

"Having reviewed hundreds or thousands of emails among traders during the 2000-01 crisis as an expert for the California Parties, it was evident that certain companies that had vertically integrated gas affiliates were using the opaque gas markets to shield how they were passing through high electricity rents by charging high prices between the affiliates. And there was no real way to check the legitimacy of those prices. (It also was pretty easy to manipulate RECLAIM prices in the same way.)"


"I've never heard of any case where a public utility was accused of buying power from their regulated subsidiary."

Utilities are not buying power, they're buying gas at inflated prices. No provider of gas to a utility is regulated, or needs to be. In fact, most specifically say so on their websites.

PG&E has over 250 unregulated subsidiaries. Do you really think the California Public Utilities Commission has the resources, expertise, or authority to audit all of them each year?

"And this story about San Onofre was all over the news a few years ago."

Of course it was, that's why I don't understand your undying faith in either the oil industry or their appointed regulators - especially, regulators with cards in the game.

Bob Meinetz's picture
Bob Meinetz on Mar 16, 2021

More info:

Public Citizen Releases Nutshell Guide to Public Utility Holding Company Act - Threatened Repeal of Law Would Pave Way for More Blackouts, Corporate Fraud

Tom Alrich's picture
Tom Alrich on Mar 20, 2021

Bob, Milton Friedman loved to start off a class by pulling a quote from that morning’s paper and showing that it made no economic sense. In the same way, the scenario you’re proposing makes no sense. You assume a regulated transmission and distribution utility has an unregulated power generation subsidiary (which is the only kind they can have, in almost every state), but is also somehow affiliated with an unregulated gas supplier. The generation subsidiary pays inflated prices to that gas supplier, to supply one of their unregulated gas-fueled power plants.

So far, so good. There’s no problem with doing that – if the generator wants to lose money on every megawatt they generate, that’s their problem. But you say further that the utility is going to “pass on” the high price that their generation subsidiary paid for gas to their electric power consumers? How could they do that? In a competitive market, they have to buy from the lowest-price provider, and there are regular auctions (usually run by the RTO) to make sure they happen. So they wouldn’t even be able to buy from their own generation subsidiary if the subsidiary charged higher prices than the market. Maybe they would try to do this under the table, and they would somehow get the PUC to look the other way. But that’s the only way it could happen.

The case would be no different if the utility bought a truck distributor, and then bought all their trucks from them. They might wildly overpay for their trucks, but they couldn’t pass that cost onto their power customers either, absent the PUC illegally letting them do that.

You need to find at least one example of this corruption happening (which I hope you would have publicized, since it would be outrageous), before I’m going to lend any credence to your statements.

Bob Meinetz's picture
Bob Meinetz on Mar 22, 2021

Tom, I've quoted two links above - one written a regulator at FERC, who describes in detail how affiliate transactions were used in the 1920s - and how, in 2003, she feared they would be (and are being) used again in the post-PUHCA era.

The other, by David Littell of the Regulatory Assistance Project, puts it in layman's terms.

I suggest you invest 10 minutes by reading both - maybe I'm not explaining it well, but either way I don't have the time to expend further effort trying to explain it to you.

Tom Alrich's picture
Tom Alrich on Mar 23, 2021

Bob, I could care less about an article about the 1920's or a 2003 article about somebody's fears that the problems could recur. Come back when you have some evidence that these problems are occurring now, or that there's even a mechanism by which they could occur.

Tom Alrich's picture
Tom Alrich on Mar 23, 2021

Bob, regarding your 3/19 report to Robert Borlick about deregulation, you're confusing different markets. There are three markets. The first is for physically delivering power to consumers. That is inevitably a monopoly, since we don't want ten companies all putting up their own distribution lines. The prices for that service are regulated by the PUCs.

The second is the market for people to buy power from some entity other than their local regulated utility. In Retail Choice states like Texas, that is possible. However, studies show it doesn't seem to save money, and of course in Texas it proved disastrous in February.

The third is the market in which regulated utilities purchase power from generators and provide it to their customers (who haven't chosen another Retail Choice option). Those markets are highly competitive, and since most power is delivered that way, it's the most important. That's the market in which the Texas PUC intervened in February, with disastrous results. But that was an aberration; these markets have performed well in the Eastern and Western Interconnects, even in stressful summer and winter peaks. Nobody is advocating getting rid of them.

Tom Alrich's picture
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