Crazy ERCOT prices show ERCOT desperately needs its neighbors

Been a bit of a crazy week in Texas electric power markets. I’m writing this on Friday, July 15, 2022–the week is not over yet–but maybe things have settled down for the next few days. On Wednesday the wholesale price in ERCOT hit its $5,000 cap on the energy price for a while in the afternoon. At the same time prices in bordering power systems ranged between $75 and $125 per MWh.

I joked on Twitter how someone with an electric Ford F-150 pickup could make money charging up on one side of town in The Woodlands (connected to Entergy Texas in the MISO region) and selling the power on the other side of town (connected to CenterPoint in ERCOT). A Twitter user calculated that a truck with the “extended range” option could carry $600 worth of power each trip.

Power Price Maps from ERCOT, SPP, MISO, and WEIM (clockwise from top left) on Wednesday, July 13, 2022

On Thursday afternoon the price in ERCOT was about $50 MWh while neighboring prices were all over $100. In fact, most of the time power prices are a little cheaper in Texas. There are currently a few small High Voltage Direct Current (HVDC) connections between ERCOT and its neighbors, but these HVDC interties are not readily available for commercial use and are too small to capture all of the potential gains from trading across the regions.

Connecting ERCOT with neighbors has been proposed before, a few times, and gets shut down in Austin by two groups (A) folks worried about loss of Texas jurisdiction over a Texas interstate market, and (B) industry consumers who believe they benefit from trapping low cost wind and solar power output in state. High-cost power generators actually do benefit from blocking interties.

(A) is a real concern, there are benefits from regulation in Austin rather than Washington DC. Among other things, ERCOT serves as an alternative “experiment” in RTO design that can serve as contrast to the other US RTOs which are all regulated by FERC in Washington DC. Oversight by a single agency cannot help but dampen some reasonable exploration of possibilities simply because the experts there will hold views about the best ways things should be done. In any case, the two most promising intertie projects both secured rulings from FERC saying the projects would not upset existing jurisdiction over ERCOT. Still, political opposition delayed and in at least one case halted development.

(B) is just wrong headed. Interties will yield lower average prices and less volatile prices in ERCOT. It doesn’t take a detailed analysis to demonstrate the point: just look at the picture and then imaging how things would change if, say, 5 GW of power could be brought in through four or five interties spread around the state. Not too hard to imagine prices in ERCOT would have nearer $1,000 than $5,000 MWh on Wednesday (and, yes, prices in neighboring areas would have been higher, but because surrounding areas are connected through the rest of the country prices in those areas might have climbed from $120 to something like $150. On Thursday power flows could have gone the other way, maybe pushing ERCOT prices from $50 to $100 while bring down neighboring prices from $120 to $110 or so.

The price changes are all guestimates. With a commercial power market model it would be easy enough to do quality estimates. (For a large fee, I can have one done! Contact me!) In fact the regulatory documents filed surround the Tres Amigas power state and the Southern Cross transmission project likely both contain this kind of analysis. While they would be out of date, they would provide some sense of the scale of benefits.

In addition, Texas has a lot of land suitable for wind and solar power generation. The ability to produce and ship that power out of state would further boost the state’s position as an energy development powerhouse. At the present we are getting into more frequent wind-on-wind competition leading to curtailment of clean energy. We are a likely soon to see some solar-on-solar competition, too.

Finally, during extreme conditions, both in Summer peaks and Winter peaks, interconnections can be lifesaving. No one needs to be reminded that people died in Texas during Winter Storm Uri because of the days long outages suffered by some consumers. Even with a handful of added interties it is likely ERCOT would have suffered outages during the February 2021 winter storm. However, the amount of load shedding would have been smaller and easier to rotate across consumers, with lifesaving results.

The ERCOT market is become more volatile and prices are higher than they would otherwise be because influential market participants and parochial interests in Austin have frustrated efforts to link up. The Southern Spirit transmission project–I think it is an adaptation of the Southern Cross project–continues to work its way through commercial and regulatory hoops. ERCOT needs it and a handful more reaching north and west.

When Lack of Government Authority is the Emergency, a Kentucky Story

Federal and state governments declare emergencies or disasters for many reasons. Currently in Arizona an estimated 25 emergency or disaster declarations are in effect. Most common reason in Arizona right now are wildfires, major storms and flooding, and a few continuing Covid declarations. Arizona has both a Covid 19 emergency declaration and a Covid 19 major disaster declaration. A FEMA dataset shows 838 emergency and disaster declarations across the U.S., though not all remain active.

Emergency declarations trigger a number of steps to facilitate government actions like disbursing funds and making it easier for state and federal responses to coordinate responses. In most states with laws prohibiting price gouging typically declaration of an emergency triggers application of the law.

Which brings us to Kentucky.

On June 23, 2022, Kentucky Governor Andy Beshear declared a “state of emergency relating to inflation and gas prices” so as to “implement provisions of KRS 367.372, et seq. as to the sale of goods and services, specifically gasoline or other motor fuels…” The declaration makes clear that all the emergency declaration is intended to do is activate the price gouging authority of the state. In other words, the emergency was the inability of the state to retroactively penalize gasoline retailers for price increases.

Average Gasoline Prices (Regular) for Ohio, Kentucky, and Tennessee, June 6-July 5, 2022

We might notice that prices had peaked about two weeks before the Governor declared the emergency and that prices have continued to fall in the nearly two weeks since. The price gouging law remains in effect only for 15 days unless extended. The enacting of state authority appears to have had no effect so far, as prices in Kentucky track the fall in prices in neighboring states.

As the law prohibits prices “grossly in excess of the price prior to the declaration” (Ky. Rev. Stat. § 367.374), permits prices to rise with fluctuations in commodity markets, and allows for other cost increases, it seems wholly unlikely the law will have any economic effect or legal consequences at all. In fact, that may be just fine with the Governor.

The real emergency in Kentucky was political, not economic. Consumers are unhappy about high gasoline prices. Understandably so; even after adjusting for inflation prices have been at record levels. Unhappy consumers are unhappy voters. Unhappy voters want to see elected officials do something. The Governor did something, and next time he is running for office he can remind voters that he did.

Of course he’ll leave out the part his “something” had absolutely zero effect and he expected it to have zero effect. The news release was the point. Governor Beshear wants voters to know he is “on their side.” Empty symbolism is good enough for Kentuckians in the Governor’s eyes.

Anti-price gouging laws get rulemaking process in New York

James Hanley and I have an op-ed on New York’s price gouging law appearing this week in Crain’s New York Business.

The New York attorney general’s office has initiated a rulemaking process intended to better ground the state’s price gouging law enforcement practices. The New York rulemaking may be the first time a state took seriously the idea that price gouging law enforcement requires careful thought. Here we take the occasion of the rulemaking process to suggest ways the state can improve its enforcement practice and reduce the compliance burden.

Sure, our favorite improvement would be simple repeal. However, as that is not on the table in New York, so we offer a few more modest suggestions.

(Plenty of economists have op-eds on price gouging that lay out the basic “supply and demand” arguments against them. I wholly endorse the standard economist’s op-ed against price gouging laws: basic economic literacy is important and and the lessons bear repetition. But many economists have written such pieces, including me. And I’ve had a longer piece on price gouging laws published in Regulation magazine. In the Crain’s op-ed we try another approach.)

Vertical disintegration for electric utilities: A half-serious proposal

At Utility Dive Ari Peskoe tries answering the question, “Can FERC convince utilities to build modern transmission systems?” Peskoe directs Harvard Law School’s Electricity Law Initiative. The summary up front succinctly states the problem.

For FERC’s rules to be successful, they must overcome utility incentives to overlook cost-saving technologies, prioritize local projects over regional investments, and thwart development of projects that might threaten their generation interests.

Notice that the incentive problem is inherent to the nature of vertically-integrated electric utilities. If a company owns transmission assets and generation assets in the same region, then decisions about transmission assets affect payoffs expected by generation assets. Similarly, decisions about generation assets affect payoffs expected from transmission.

A company board and management cannot be made to be ignorant of the interactions. The board and management of vertically integrated utilities have inherent incentives to invest in transmission assets in ways that do not detract from the value of their generation assets. No code of conduct erases the incentives. Executives may be prohibited from stating the obvious, but they cannot be prohibited from thinking the obvious.

Peskoe said, “Rather than expanding transmission to increase interconnectedness, utilities have recently been mired in small-scale projects that often simply rebuild last century’s grid.”

Not too surprising, right?

The grid built up last century primarily served to connect a monopolist’s generation to the monopolist’s locked-in customer base. That grid and the companies generation fleet were developed together in ways that made sense to utility shareholders last century. That grid enhances the value of old generation assets to utility shareholders even while it may reduce the overall value of the grid to society.

One possible fix is an old idea that was mostly ignored in the US: the transco.

The federal government should prohibit ownership ties between transmission and generation. (Ownership ties between transmission/distribution and retailing are also suspect, but that is less of a federal issue.) Spin off all transmission in an RTO to a single transmission owner with no financial ties to generation or retailing companies. That transco would remain a FERC-regulated public utility. Competition among generation is heightened when the bias created by vertical integration is removed.

So, half seriously, I’m proposing a ban on vertical integration in the electric power industry.

Only half seriously because it would be a fairly heavy handed regulation. Vertical integration often provides economies that dis-integration would eliminate. But here it seems that vertical integration of transmission and generation assets is driving anti-competitive behavior that itself has high costs. Two decades ago FERC and most utilities involved in the formation dismissed the transco idea. Might have been a mistake, as two decades of FERC frustration around transmission investment suggests.

Virtical disintegration. It’s a half serious proposal that requires serious consideration.

I admit it, I was wrong (about a federal government price gouging investigation)

Recently a handful of politicians called upon the Federal Trade Commission to investigate oil companies for potential price gouging. I was reminded of an episode from a few years back in which politicians called upon the US Department of Transportation to investigate potential price gouging by airlines.

An Amtrak train derailed in Philadelphia in May 2015, interrupting passenger service in the area for several days. Air travel rates jumped along some affected travel routes. In response Senators and Members of the House called upon the DOT to investigate.

I blogged about the calls for investigation in a July 2015 post at Knowledge Problem. There I made the following prediction:

After a month or two the DOT will report finding that airline prices did jump suddenly after the derailment as demand for air travel jumped up. They will observe that initial price spikes resulted from airlines’ computerized pricing mechanisms and did not reflect an intent to “take advantage of stranded passengers in the wake of such a tragic event.” They will note that airlines responded by adding flights and pressing larger aircraft into service. The report will conclude temporary price spikes reflected the ordinary workings of supply and demand under short-lived extraordinary circumstances. No finding of unfair practices will result, and no trade practices will be condemned.

I did not recall whether the investigation led to any particular conclusion, so I Googled it. To my surprise, my prediction was wrong in a key part.

I wrote “after a month or two the DOT will report…” but it was actually 18 months before DOT concluded its investigation. There was no report. Rather, as the Associated Press described it, the “department quietly sent letters to the airlines” stating the investigation had concluded. The DOT said it found “no evidence of unfair manipulation of airfares or capacity, nor evidence of unconscionable increases in fares beyond normal pricing levels.”

I was wrong on the timing of DOT action, but right about what it would find.

One wildcard this time around. The new chair of the FTC is a strong critic of existing competition policy practice. Last September the FTC announced several efforts to boost scrutiny of gasoline markets. Perhaps under new management FTC lawyers and economists will come up with some new theory of price gouging to justify doing something.

More likely, sometime after the November 2022 elections, the FTC will conclude they found no widespread market manipulation or price gouging. It won’t make much news when they conclude the report.

Inflation and the origins of anti-price gouging regulation

Inflation and price gouging are both in the news. You likely don’t need reminding about inflation, currently running at an 8.5% annual rate. Not surprisingly, the story on inflation was accompanied by a picture of a gas pump. The New Jersey government reports receiving more gasoline price gouging complaints in March than it saw in the previous two years.

Inflation, oil prices, and price gouging laws have a surprising historical connection. At least this is my claim: had inflation not been a problem in 1970 and 1971, we would not have price gouging laws in 37 states in 2022.

The links in my chain of reasoning are as follows:

  1. In 1970 and 1971 inflation had become a public policy problem. President Nixon, looking forward to his 1972 reelection campaign, imposed broad-based wage and price controls in August of 1971.
  2. While most price controls disappeared quickly (consumers hated shortages even more than price increases), oil price controls remained politically popular and continued through the 1970s.
  3. In 1979 President Carter began slowly lifting the price controls, with the predictable short run consequence of higher and more volatile prices.
  4. Higher heating oil prices and cold weather in New York prompted an outcry by voters, and the state legislature responded with the nation’s first anti-price gouging law.
  5. New York’s law was followed by three more states in the 1980s, eleven more in the 1990s, another sixteen in the 2000s, and six in the 2010s.

I rely on a bit of speculative consumer psychology: my view is that during the 1970s consumers became used to (a) relatively stable home heating oil prices, and (b) oil prices as an intensely political matter. Maybe (b) is true even if (a) is not, but it seems notable that it was home heating oil price increases that motivated legislative action.

It is possible, of course, that other states would have pursued price gouging laws even had New York not done so in 1979. In fact, New York might have acted anyway sometime later, in response to some other price jump. The three states that followed in the 1980s were Connecticut, Alabama, and Hawaii. I don’t know the circumstances of the legislative actions in those three states, so don’t know if New York’s action was important. Research on these three histories would be suggestive, either for or against my view.

But plausibly without New York’s action in 1979, other states would have responded to the politics surrounding emergency price increases in other manners and price gouging laws would be fewer than 37 in number in 2022.

[I blogged copiously on price gouging related topics at Knowledge Problem. See also my “The Problem with Price Gouging Laws” in the Spring 2011 issue of Regulation magazine.]