Next week, the Texas Supreme Court will hear oral arguments to determine the legality of a 2021 Public Utility Commission of Texas (PUC) rule that arbitrarily raised the price of electricity to $9,000 per megawatt hour during Winter Storm Uri—about four times the market price at the time.
The Texas Third Court of Appeals found the rule illegal last year; the Supreme Court is hearing the case after the PUC appealed the earlier decision.
When the Texas Legislature introduced competition to most of the Texas electricity market back in 1999, it determined “that the public interest in competitive electric markets requires that … electric services and their prices should be determined by customer choices and the normal forces of competition.”
It was in this context in 2021 that the PUC made the decision to illegally set the price of electricity itself by completely eliminating the legislatively mandated role of competition and consumer choice in the setting of electricity prices
The conditions brought by Uri put extreme pressure on the Texas grid as the ability to meet historically high demand was crippled by the increasing strain on generation capacity. The PUC was also under pressure from politicians who did not want to get blamed by the blackouts. At that point, the PUC issued its order to set the prices of electricity at $9,000 per MWh and thus “exceed[ed] the Commission’s statutory authority” according to the Texas Third Court of Appeals. The court got it right.
One of the best ways to understand how the PUC’s February 15, 2021 order runs counter to the normal forces of competition is to examine prices that are set in a market with little or no competition, i.e., a market operating under monopoly conditions.
Economist Adam Smith explains what happens when prices are set under monopoly conditions rather than under competition is: “The monopolists … sell their commodities much above the natural price. The exclusive privilege of corporations and all those laws which restrain … the competition … have the same tendency. They … keep up the market price of particular commodities above the natural price.… Such enhancements of the market price may last as long as the regulations of policy which give occasion to them.”
Thus we see that prices set outside of the normal forces of competition are prices that are “much above the natural price” that we would expect in a competitive market. These monopoly prices can only exist when an entity has gained an “exclusive privilege” to set prices that cannot exist in a market where “prices [are] determined by customer choices and the normal forces of competition.” And they “may last as long as the regulations of policy which give occasion to them.”
These conditions and prices are exactly what were in place in Texas during the week of February 15, 2021. Acting as if it were a monopoly, the PUC took for itself, contrary to statute, the “exclusive privilege” of setting a fiat price through its adoption of its price-setting rule. “Free competition” among market participants and “customer choice” were excluded from the setting of the price through the PUC’s action. And until both were allowed to return to the market, prices remained “much above the natural price.”
According to a study by London Economics International, the average market price during Yuri would have been “$6,578/ MWh lower than the prices which resulted from implementation of the PUCT Orders.” Energy analyst Robert Bryce explains the cost of this to Texans, “calculating the excess cost to ratepayers for the overpriced electricity is straightforward. Over that 80-hour time period, electricity demand in Texas was about 50,000 megawatts. Thus, a bit of simple multiplication — $6,578 x 80 hours x 50,000 MW — shows that Texas consumers were overcharged by roughly $26.3 billion due to the inattention or incompetence of officials at the PUC and ERCOT.”
ERCOT’s IMM calculated that the PUC’s fiat price during the week of February 15, 2021 was almost 60 times greater than competitive prices over the previous 13 months. Similarly, the IMM also calculated that the PUC’s fiat price resulted in the average price for 2021 being almost seven times higher than in the previous year.
The PUC’s price-setting rule imposed what was essentially a monopoly price on the ERCOT market for 80 hours bears no resemblance to the natural forces of competition. Through its action of adopting its price-setting rule, the PUC essentially imposed a $26.3 billion monopoly tax on buyers of electricity in the ERCOT market.
The Texas Supreme Court must recognize the illegality of the PUC’s action to ensure something like this does not happen again.
