The electricity grid of Texas has regularly been promoted as a shining example of energy deregulation, and the state has some of the cheapest electricity prices in the nation, largely thanks to it being the largest energy producer in the nation with a large natural gas pipeline network.
So what are the flaws? Capacity versus energy? Price caps too high?
Also -- citation needed on "Bank of America’s power trading arm are heavily invested in utilities and energy contracts."
Are Wall Street banks invested in utilities? If so, they're losers in the Texas PUC decision, which your own link says the PUC Commissioner is trying to "keep billions of dollars from being returned to utilities."
But wait....someone just said "Bank of America's power trading arm is heavily invested in utilities" and thus the PUC Commissioner's statement is a huge loss for Wall Street! Because billions won't be returned to the utilities in which power trading arms hold investments.
Or wait...no...umm...what's actually happening here?
Good question. For one, the lower price cap could certainly be worded so that it is never higher than the higher price cap.
There's some detail as to how the process of price setting works that I am not familiar with, but in general there shouldn't be a need to set prices by fiat. If demand was as high as it was, the market price should have naturally increased. If that's not working, then why bother having a deregulated market? I was surprised that the PUC even had that authority.
Also worth keeping in mind that El Paso, which is not in ERCOT, didn't have the same issues during Uri.
> Are Wall Street banks invested in utilities? If so, they're losers in the Texas PUC decision, which your own link says the PUC Commissioner is trying to "keep billions of dollars from being returned to utilities."
So in the case of Vistra Energy's lawsuit, it's utilities on both sides. Generators vs. Suppliers/Distributors (e.g. Vistra). But then there's also the burden on ratepayers--Texas residents and businesses--who got hit with massive bills.
The Texas Monthly story makes it sound like the Wall Street investment is largely in the generators. Vistra is also a public company so there's investment on both sides. But to be honest, without actual details on investments, I don't think anybody really knows who is invested in what.
For what it's worth, deregulated US energy markets have price caps. I believe it's $1,000/MWh in PJM (or at least it was when I was more actively involved in that derivatives market). As you mention, it's a little inconsistent to have a market price and a regulatory cap on that price, but that's the market structure nearly everywhere in the US.
I'm not familiar with the price setting process in ERCOT, but also notable they do not have a capacity market. The higher spot price cap for energy (i.e. the $10,000/MWh cap) is theoretically designed to compensate for the lack of a capacity market. But even where capacity markets exist, they have problems. PJM's capacity performance rules are an example of an additional set of requirements layered on top of prior capacity markets rules designed to "fix" flaws in its capacity market. If you're interested, PJM has a report on what happened in their markets during the 2014 polar vortex that steps through a similar event where there was a lot of forced outages. It was primarily that event that prompted the additional capacity performance rules that are now in effect in that market.
On the investment side - it's highly, highly unlikely a bank holding company or BHC subsidiary like Bank of America (or any of its subsidiaries) holds equity investments in utility companies. Bank balance sheet capacity is a scarce resource and there are restrictions on what banks can do for their own accounts (Volcker rule). More likely the banks are counterparties to derivative contracts that saw big increases in fair value due to higher gas prices. Something like a financially settled forward purchase contract for natural gas or a swap contract where a run-up in gas/power prices is benefiting one leg of the swap. They probably do not enter into many physically settled contracts if I had to guess.
Also for what it's worth, BAC specifically did not disclose anything related to this event in their FY21 Q1, Q2, or annual FY21 financial statements - highly suggestive it's not material to them at all, even to their first quarter results.
The real people who got killed by this event are those who are (1) structurally short power or gas and didn't hedge (retail marketers, distribution utilities) and (2) structurally long power generators who DID hedge and thus had to sell at their fixed price forward commitments without being able to sell at the much higher market price. Since the retail marketers can just go bankrupt or otherwise fail to perform on their obligations and the utilities are basically pass-through entities due to their regulatory recovery mechanisms, this is how power customers (retail yes, but also commercial and wholesale industrial) end up holding the bag.
As I see it, that's kinda unavoidable no matter what the market structure is...
So what are the flaws? Capacity versus energy? Price caps too high?
Also -- citation needed on "Bank of America’s power trading arm are heavily invested in utilities and energy contracts."
Are Wall Street banks invested in utilities? If so, they're losers in the Texas PUC decision, which your own link says the PUC Commissioner is trying to "keep billions of dollars from being returned to utilities."
But wait....someone just said "Bank of America's power trading arm is heavily invested in utilities" and thus the PUC Commissioner's statement is a huge loss for Wall Street! Because billions won't be returned to the utilities in which power trading arms hold investments.
Or wait...no...umm...what's actually happening here?
> So what are the flaws?
Good question. For one, the lower price cap could certainly be worded so that it is never higher than the higher price cap.
There's some detail as to how the process of price setting works that I am not familiar with, but in general there shouldn't be a need to set prices by fiat. If demand was as high as it was, the market price should have naturally increased. If that's not working, then why bother having a deregulated market? I was surprised that the PUC even had that authority.
Also worth keeping in mind that El Paso, which is not in ERCOT, didn't have the same issues during Uri.
https://www.texasmonthly.com/news-politics/el-paso-electric-winter-storm-2021/
> Are Wall Street banks invested in utilities? If so, they're losers in the Texas PUC decision, which your own link says the PUC Commissioner is trying to "keep billions of dollars from being returned to utilities."
So in the case of Vistra Energy's lawsuit, it's utilities on both sides. Generators vs. Suppliers/Distributors (e.g. Vistra). But then there's also the burden on ratepayers--Texas residents and businesses--who got hit with massive bills.
The Texas Monthly story makes it sound like the Wall Street investment is largely in the generators. Vistra is also a public company so there's investment on both sides. But to be honest, without actual details on investments, I don't think anybody really knows who is invested in what.
Footnote will be added for clarity.
For what it's worth, deregulated US energy markets have price caps. I believe it's $1,000/MWh in PJM (or at least it was when I was more actively involved in that derivatives market). As you mention, it's a little inconsistent to have a market price and a regulatory cap on that price, but that's the market structure nearly everywhere in the US.
I'm not familiar with the price setting process in ERCOT, but also notable they do not have a capacity market. The higher spot price cap for energy (i.e. the $10,000/MWh cap) is theoretically designed to compensate for the lack of a capacity market. But even where capacity markets exist, they have problems. PJM's capacity performance rules are an example of an additional set of requirements layered on top of prior capacity markets rules designed to "fix" flaws in its capacity market. If you're interested, PJM has a report on what happened in their markets during the 2014 polar vortex that steps through a similar event where there was a lot of forced outages. It was primarily that event that prompted the additional capacity performance rules that are now in effect in that market.
On the investment side - it's highly, highly unlikely a bank holding company or BHC subsidiary like Bank of America (or any of its subsidiaries) holds equity investments in utility companies. Bank balance sheet capacity is a scarce resource and there are restrictions on what banks can do for their own accounts (Volcker rule). More likely the banks are counterparties to derivative contracts that saw big increases in fair value due to higher gas prices. Something like a financially settled forward purchase contract for natural gas or a swap contract where a run-up in gas/power prices is benefiting one leg of the swap. They probably do not enter into many physically settled contracts if I had to guess.
Also for what it's worth, BAC specifically did not disclose anything related to this event in their FY21 Q1, Q2, or annual FY21 financial statements - highly suggestive it's not material to them at all, even to their first quarter results.
The real people who got killed by this event are those who are (1) structurally short power or gas and didn't hedge (retail marketers, distribution utilities) and (2) structurally long power generators who DID hedge and thus had to sell at their fixed price forward commitments without being able to sell at the much higher market price. Since the retail marketers can just go bankrupt or otherwise fail to perform on their obligations and the utilities are basically pass-through entities due to their regulatory recovery mechanisms, this is how power customers (retail yes, but also commercial and wholesale industrial) end up holding the bag.
As I see it, that's kinda unavoidable no matter what the market structure is...
¯\_(ツ)_/¯
Thanks, a lot of great detail in there.
Looking at PJM's report on the polar vortex, they talk about the storm forcing their price cap: $1,000/MWH
https://www.hydro.org/wp-content/uploads/2017/08/PJM-January-2014-report.pdf