The Texas Power Crisis is Far From Over, a Wave of Bankruptcies is Next

Mish

The Texas power crisis morphed into a new stage, bankruptcies.

Texas Power Outages

On February 17 I noted Texas Power Outages Stretch Into Third Day, Millions are Still Without Electricity.

An unusual and prolonged arctic blast left millions without power. Prices surged from 12 cents per kilowatt-hour to $9 per kilowatt-hour.

Those most affected by the price hikes were on "variable-rate power plans." Those plans give energy companies the discretion to change the price depending on consumer demand.

The outages are over but the damage isn't.

Huge Bills and a Class Action Lawsuit

Lisa Khoury, a Texas woman who received a $9,300 Electricity Bill filed a class action lawsuit against Griddy, an electricity company.

Griddy charges its customers $10 a month and provides electricity at whatever the wholesale rate is, according to the Texas Tribune. 

The proposed class action suit would cover all Texas Griddy customers who received “excessive charges” after the storm.

The lawsuit, which was filed in a Harris County state district court, seeks more than $1 billion from Griddy for allegedly violating the Texas Deceptive Trade Practices Act.

Griddy did not immediately reply to a request for comment, but said in a statement on the company’s website that the Public Utility Commission of Texas (PUCT) directed ERCOT, the council that manages the flow of power to Texans, to set wholesale pricing at $9/kWh – roughly 300 times higher than the normal wholesale price.

As explained above, ERCOT, not Griddy, set the wholesale price. 

Arguably, this is what happens when you try to save pennies by opting for plans that charge wholesale rates. 

Market Disruptor

A Houston startup offered customers an allegedly great deal. Customers would pay the same wholesale price for electric power as the big companies that buy it bulk.

Griddy vowed to be a Market 'Disrupter'. Giddy kept its promise. 

"I got hit with $2,500 a day, and so now my bill is a little over $11,000," said Houston resident and Griddy customer Akilah Scott-Amos said in a video that went viral.

Texas Attorney General Ken Paxton filed a lawsuit against Griddy, accusing the company of "misleading and deceptive advertising and marketing practices."

Brazos Electric Power Cooperative Files Bankruptcy

Bloomberg notes the Texas Power Market Shortfall Jumps to $2.5 Billion.

High prices put a financial strain on some utilities, power retailers and generators. On Sunday, Brazos Electric Power Cooperative, the largest power generation and transmission cooperative in Texas, filed for bankruptcy after racking up an estimated $2.1 billion in charges over seven days of the winter storm. The company owes Ercot a disputed $1.8 billion in collateral.

If Ercot cannot come up with financing to cover the underpayments, the debt could end up being shared by everyone in the Texas market, including consumers. Amid the fallout, seven of Ercot’s board members have resigned. The head of the Public Utility Commission of Texas resigned Monday.

More Companies Skip Payments

The Texas power crisis deepened today as More Companies Skip Payments.

Texas energy companies failed to pay another $345 million for electricity and other services incurred during last month’s cold snap, the operator of the state’s grid said on Monday.

Electricity prices on the state’s wholesale market soared by $47 billion for the about five-day period when cold weather drove up demand and generating plants failed, estimated Carrie Bivens, a vice president at Potomac Economics, which monitors the Texas power market.

In all, electricity providers skipped out on $2.46 billion in power and service charges, grid operator Electric Reliability Council of Texas (ERCOT) said. It applied $800 million from collateral and other accounts to reduce the cumulative shortfall to $1.66 billion.

ERCOT did not disclose which companies failed to pay the bills, but said it will begin naming firms and the amounts they have failed to pay in the future.

A spokeswoman for Governor Greg Abbott declined to comment on Monday’s bankruptcy filing or on proposals that the state’s Public Utility Commission roll back fees that skyrocketed during the blackout.

Expect More Bankruptcies

More bankruptcies, perhaps even some on the personal level, are on the way. 

Consumers were happy to pay "wholesale" prices, until they weren't. 

History Lesson

I recall a plethora of phone calls back in 2005 and again in 2008 when Natural Gas futures spiked to $15.70 and $13.70 respectively. 

The conventional "wisdom" at the time, which I vigorously fought, was that inflation was going to the moon and NG would soon be at $40. 

The reverse happened in Texas. 

Big Winners and Losers

I smell some big winners in this mess.

Who? The lawyers, of course.

They will have a field day with all the coming lawsuits.

The losers will be those who did not get sucked into wholesale price schemes because bureaucrats will undoubtedly decide to bail out some at the expense of others. 

Mish

Comments (56)
No. 1-21
PecuniaNonOlet
PecuniaNonOlet

“Heads I win, tails you lose” as taxpayers end up bailing out companies, cities and consumers. It is socialism dejavu all over again.

Mr. Purple
Mr. Purple

This catastrophe will slow or reverse emigration to Texas.

Realist
Realist

LOL!

  1. How the hell do we pay for all this!
Jojo
Jojo

"variable-rate power plans" is the equivalent of trading naked options.

I wonder why the TX politicians didn't require some limits to the apparent potentially unlimited exposure? Average people don't understand risk.

Rippletum
Rippletum

Typical Republican run programs

Casual_Observer
Casual_Observer

All those businesses that relocated to Texas are probably thinking twice now. At the peak of the Texas crisis, the state lost 85% of its power generation. In all the years of rolling blackouts in California, the state ever on lost a peak of 3% of their capacity. Now Texas businesses are going to get huge power bills. Maybe Musk can build a battery farm.

Call_me_Al
Call_me_Al

If only they knew they were paying premium prices they could (or would) have thrown their breakers.

@Jojo, that is an apt analogy on the naked shorts - I suspect they didn't know any risk existed.

Casual_Observer
Casual_Observer

There is some irony in Enron-like trading structures collapsing the grid in Enron's home state.

Doug78
Doug78

Perhaps someone could help me here. I f I walk it through Texas has a power grid that is for the most part isolated from those in other parts of the country. Cold hits, generation capacity drops for technical reasons and to keep grid from failing the power company rations electricity. So far it’s a conventional reaction to a cold snap. The company sends incredibly exorbitant bills to its clients for electricity they used.
Question 1) Were those bills a result of an algorithm that calculates prices charged on demand and supply?
Question 2) Were those bills exorbitant because the company had to buy electricity from an outside source who charged the company exorbitant rates?
Question 3) Power companies normally use hedging strategies to manage their financial risks. Is this a case of their strategy because if the unforeseen conditions blowing up in their face and causing a big loss?
Now we have to follow the cash and see where it stops.
In the first question an algorithm blindly applied its formula and people received exorbitant bills. This is aberration and management can step in, say the bills are a mistake and promise to drop the bills down to reasonable. Management can do this because the cash sucked from clients’ accounts are in the company’s treasury. They do it keep their clients, their reputations and their lives because Texas clients are heavily armed. This is the best scenario.
The second question is more difficult because the money transited to a third party and it will somehow have to be reclaimed. In this case the power company was gouged by a third party. Here it could go to the courts in principle but probably be settled out of court. It’s a reputational thing on both sides. This scenario is not good because it is very messy but it is solvable.
The third question is the nuclear one. If the hedging strategies blew up then the cash is no longer in the company and is impossible to recuperate. One top of it the company could be in hock for much much more. The only thing to do is declare bankruptcy and beg someone to take them over. Management resigns and heads for Venezuela because it doesn’t have an extradition treaty with the US.

Sechel
Sechel

Doesn't seem like ERCOT has yet to take responsiblity. It's blaming the freemarket for failing to price in an incentivize reserves and winterirzing. Maybe Texans can sue Mr. Free Market?

Eddie_T
Eddie_T

It’s been understood by all the players (except the consumers) that this could and might happen. Watchdogs have been predicting it for years.

It was a trade-off made to keep rates low in normal times, and the real risk of a outlier weather event was discounted. This was the worst wether event in most people’s lifetime here. Shit happens.

Everybody is blaming everybody else. Our indicted (but never convicted) AG is suing the company with the egregious variable rates....and consumers were told (by the governor, I think, not to pay their humongous bills.

The power companies will get bailed out...they are the power companies. Modest changes in making the whole system more resilient will be taken, but probably nothing too radical.

Life goes on.

It won’t change the demographics much. I doubt the mass migration to Texas slows down. It’s a bump in the road.

njbr
njbr

Whatever could go wrong in an unregulated captive market?

PostCambrian
PostCambrian

I would be a little more sympathetic to Texas if it didn't fight so hard to keep their electrical system from being interconnected to the rest of the United States. Importing power would have helped them in this situation.

It seems as if the Texas AG is being political. If Griddy's marketing was deceptive it would have been much better to file suit BEFORE any of this happened. They promised wholesale prices and everyone got them. Texas is blaming Griddy for not predicting what the rest of the state (including ERCOT) failed to predict. It was easy for those of us from California to predict because we already got screwed by a Texas company (Enron) and we are still paying for it (although like Texas some fault lies with the PUC for not anticipating what can happen in a totally deregulated market). A better model for utilities is the regulated monopoly which costs more than wholesale but doesn't have the great price spikes when there is trouble. Some states still use that. The utility is required to provide power and therefore they have long term contracts for fuel. Of course with long term contracts sometimes you are paying more than spot price and other times you are paying less than spot price but the price is well known in advance.

Eddie_T
Eddie_T

"It seems as if the Texas AG is being political”

Ya think?

The slime ball was himself in Utah during the freeze, on the state payroll doing important AG things, and probably hanging out with one of the oil billionaire brohans who got him elected.

TCW
TCW

"the Public Utility Commission of Texas (PUCT) directed ERCOT...to set wholesale pricing at $9/kWh" Why would a public commission do this? How did they arrive at that figure?

KidHorn
KidHorn

No one here knows what really happened. There will be investigations like there were with Enron in California a couple of decades ago. We'll eventually find out what actually happened.

Agave
Agave

Texas Attorney General Ken Paxton filed a lawsuit against Griddy, accusing the company of "misleading and deceptive advertising and marketing practices."

LOL. Talk about supreme irony. Paxton's corrupt to the core. Several of his own staff accused him of corruption so deep that they publicly announced it and left their jobs. I believe he's under investigation as we speak, and flying off to Utah during the crisis won't help him evade it. He's also the guy who started the nonsense lawsuit trying to disenfranchise Pennsylvania and Georgia (IIRC) voters by claiming their presidential vote counts were fraudulent too. Tossed straight out of court! What a sad tool.

On another front, the reports of Californians emptying out and fleeing for other states are a bit premature. Most moving from the Bay area anyway are just moving to other parts of the Bay Area and California. Once the pandemic is over, I predict we'll face yet another wave of newbies coming in just like always. It's just too desirable living here (I say that having lived in most parts of the country except the northeast), though the cost of living isn't well suited for those without the means or job prospects to cope.

Here's what's happening with Bay Area migration, though it doesn't address similar data from the rest of the state, which I haven't seen yet:

aprnext
aprnext

100% right-on. Oh, 99%. Excerpt: when you try to save pennies by opting for plans that charge wholesale rates. ...when you don't provide in your Income/Expense statement for Reserves for Replacement.

KCan
KCan

What about those that list family members because they literally froze to death? Who is going to pay for that?! It’s murder because they knew what they were planning! Renewables don’t work in a TX freeze and Texas freezes usually this time of year like clockwork!


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