What does Texas gain from keeping its electrical grid independent?

Question

A recent article by the Texas Tribune explains why Texas has its own electrical grid:

The Texas Interconnected System — which for a long time was actually operated by two discrete entities, one for northern Texas and one for southern Texas — had another priority: staying out of the reach of federal regulators. In 1935, President Franklin D. Roosevelt signed the Federal Power Act, which charged the Federal Power Commission with overseeing interstate electricity sales. By not crossing state lines, Texas utilities avoided being subjected to federal rules. "Freedom from federal regulation was a cherished goal — more so because Texas had no regulation until the 1970s," writes Richard D. Cudahy in a 1995 article, "The Second Battle of the Alamo: The Midnight Connection."

But what exactly does it gain from staying independent? Is it purely a political statement or is there a rational reason behind having a completely separate grid?

Answer 1

Citing Economist.com coverage

The state’s deregulated power market is also fiercely competitive. ERCOT oversees the grid, while power generators produce electricity for the wholesale market. Some 300 retail electricity providers buy that fuel and then compete for consumers.

For years the benefits of Texas’s deregulated market structure were clear. At 8.6 cents per kilowatt hour, the state’s average retail price for electricity is around one-fifth lower than the national average and about half the cost of California’s.

On the flip side of things

Because such cold weather is rare, energy companies do not invest in “winterising” their equipment, as this would raise their prices for consumers. Perhaps most important, the state does not have a “capacity market” to ensure that there was extra power available for surging demand. Such systems elsewhere act as a sort of insurance policy so the lights will not go out, but it also means customers pay higher bills.

On the practical side, it would thus seem that, due to competition there are a lot of, small, providers who compete on price. Thus there are real advantages.

Citing ERCOT itself

Cmmission Chairman Donna Nelson says the federal Power Act was a key moment Congress passed the law in 1935 to regulate the interstate activities of electric power the utilities in Texas were smart and they got together and they made an agreement that nobody was going to send power outside of Texas

the Public Utility Commission and that independence has been jealously guarded I think both by policymakers and by the industry in our cot the next major change came in 1965 after the worst power outage in US history the blackout did not impact Texas

Add up what seems to be an end in itself, "avoiding those horrible Federal busybodies" and lower costs and you have the positive sides.

From ARS

This deep-seated aversion to regulation recently prompted former US Energy secretary and Texas Governor Rick Perry to quip, "Texans would be without electricity for longer than three days to keep the federal government out of their business.”

Unlike the lofty claims made in another answer, keep in mind that California, on the other end of the regulation scale, ends up with higher prices, unreliable electricity and a near-monopoly provider whose rather relaxed maintenance procedures directly triggered wildfires that killed 85 people at one sitting. In fact, if you think of a government monopoly as the ultimate form of regulation, it is rather infrequent that consumers benefit from low costs under those circumstances (leaving out oddities like governments bribing their voters via subsidies like Venezuelan gas prices).

On the negative side, while overregulation and government overreach can be a problem, reasonable regulations do exist for a reason. An airbag in a car is a total waste of money, until it blows up and saves a life. Forcing utilities to make their systems more redundant and cope with extreme ranges in their operating circumstances, if done well, can make them more resilient.

With so many providers competing on price in a highly deregulated environment, one can assume the Texas utilities did as little as possible to design in safety margins and in fact the ongoing debrief of where things broke down shows things broke down pretty much everywhere, from wind turbines to gas to nuclear.

The picture of what went wrong in Texas is incomplete. But while some wind generators did go offline as turbines iced over, the state's largest grid, the Electric Reliability Council of Texas, said the shortage was driven by a failure not of renewable sources but of traditional "thermal" sources: coal, nuclear and especially natural gas. Energy experts said that gas lines supplying gas-fired plants may have frozen or that supplies to the plants may have been limited as gas was prioritized for homes that rely on gas for their heat.

Citing ARS again

Power plants obviously operate much farther north than Texas, in areas where the conditions Texas is facing now are normal for weeks or months at a time. There are ways to cold-proof various systems; wind turbines, for example, can have heaters embedded in the blades to shed ice when needed, intake pipes can be heated by exhaust from power plants, etc. But all of these measures cost additional money, which may be difficult to justify if the conditions they're needed for are extremely rare.

It turns out that these conditions are rare in Texas, but not extremely so; Texas faced something similar a decade earlier, in 2011, when its grid suffered similar failures.

Reuters, has another, largely uncomplimentary writeup that gives a bit more detail about that absent capacity market and ERCOT's mishandling of this event.

Last, but not least, in the context of switching to wind and solar renewables, on which Texas is unexpectedly active, you want to interconnect as much as possible to avoid regional intermittency.

Texas electricity is sowewhat cheaper than the national average. How much of that is due to avoiding Federal regulation is unclear, as Texas in any case enjoys advantages of scale, resources and geography. But it is also clear lacking interconnects and an overly light touch on actual resiliency engineering - as opposed to NIMBY-type regulations as in California - has developed not necessarily to Texas's advantage.

Answer 2

As a general rule, regulation transfers costs from consumers to producers, while deregulation transfers costs from producers to consumers. In this specific case, that works out like so:

• With regulation, energy producers would be required to take precautionary steps to ensure the security and viability of the power grid, and could be held accountable for failures to do so. In other words, the energy producers would have to pay up-front to upgrade their equipment, and if they didn't do so they could be subject to penalties and lawsuits for any harm that came from inaction. This would have a significant impact on their profit margins.
• Without regulation, energy producers are not obliged to pay up-front for upgrades, and have better legal protections against fines or lawsuits for not doing so. The costs incurred from a disaster of this sort will be absorbed by the state or federal governments through emergency management procedures, and will ultimately be paid by the taxpayer. Corporate profits are increased by cutting corners, with little or no financial risk to the corporations themselves.

This is essentially the same thing that happened during the California energy crisis back in the late 1990s, the Flint Michigan water crisis, and other less severe cases caused by reckless deregulation under GOP administrations

Answer 3

I'll point out here that the cheaper-than-average electricity prices that TX sees (according to the answer based on the Economist) is actually somewhat of a recent thing. Despite TX avoiding "the feds" for decades, for the 2000-2010 decade their prices mostly tracked the national average.

And as a difference graph:

(If someone can find comparative figures before 2000, those would be interesting for a fuller picture.)

Concomitantly with these price decreases in the past decade, spare generator capacity has also decreased in TX in the same time frame.

Since 2010, ERCOT’s reserve margin - the buffer between what it can produce vs. forecasted demand - has dropped to about 10% from about 20%. This has put pressure on generators during electricity demand spikes, making the grid less flexible, NERC said.

This was somewhat predictable, because the TX system pays only the generators that sell energy on that very day, which creates some perverse incentives from a reliability standpoint when prices are predicted to spike (why sell electricity today when you can sell it for much more tomorrow?).

Under existing market rules, the incentive for investing in better protection against cold weather is unclear, said Daniel Cohan, an engineering professor at Rice University. "To me our system of electricity is like selling lottery tickets," he said.

"Ninety-five percent of the year they're selling power for peanuts,” Cohan said. “They're counting on selling power at times like these when power prices spike 300 times their normal rate."

So, "race to the bottom" (in both price but also spare capacity) is basically the advantage (which you could put in scare quotes in that capacity regard) in recent times. Various advocates of this model have praised it (as recently as 2019) as the best thing ever: continuously decreasing overcapacity reserve was touted as an absolute plus with "naysayers" incapable of finding any concrete failures, according to said advocates. x

I know little about FERC, but I think they aren't actually in the business of regulating spare capacity in itself, as far as I know. In the post-CA-Enron-scandal days, it seems FERC were pretty/mostly concerned with companies manipulating and cornering a deregulated market, which however FERC generally advocated for. So, even being subject to FERC would in itself probably not avoided this pitfall of state-policies driven reduction in spare generator capacity. Nor being subject to FERC rules in itself seems to impede deregulating a state's electricity market to a large degree.

Apparently if a state (subject to FERC) does have a spare capacity market (which TX doesn't, but other states have) then FERC does get their say/veto whether the state's spare capacity market is operating fairly or not. Alas, as FERC commissioner appointments are political, they sometimes break along political lines in such decisions.

The issue of FERC involvement in spare capacity markets however hasn't made the news much, compared e.g. to the more hotly contested issue of whether price caps should be imposed when the (regular) market is operating close to its supply capacity, which was a more salient problem in CA in the previous decade; CA seemingly had to lobby FERC for caps. TX basically avoids that kind of federal interference and e.g. ERCOT has been tweaking their price caps in the recent crisis, although it's a bit unclear in which direction, as they made several decisions in a short time span, some countermanding others. I haven't followed the whole saga, but apparently the end result was no to change to the price cap. However, I suppose that greater state authority/flexibility in such matters may be plus, as it allows faster decision making. (In the recent crisis, the ERCOT wholesale price climbed from around $50 to the ERCOT-set cap of $9000/MWh where it stayed for a couple of days, before dropping to $5. That $9000/MWh price cap was also reached in the summer of 2019, but for a substantially shorter period of time.)

More broadly, since 2005-2006, FERC does have a mandate related to grid reliability

Pursuant to the Energy Policy Act of 2005 (EPAct 2005), Congress expanded FERC’s role and jurisdiction under the Federal Power Act (FPA) by adding a new section 215 pertaining to electric grid reliability. Section 215(e) of the FPA authorizes the Commission or an Electric Reliability Organization (subject to review by FERC) to impose a penalty on a user, owner or operator of the bulk power system for a violation of a Reliability Standard. A penalty must “bear a reasonable relation to the seriousness of the violation” and must take into account the efforts by the owner, operator, or user to remedy the violation in a timely manner (FPA section 215(e)(6)). EPAct 2005 provides that persons and organizations that violate a Reliability Standard are subject to civil penalties of up to $1 million per day per violation, helping to ensure reliability of the nation’s bulk power system.

FERC actually delegates those reliability standards to the NERC:

Section 215 of the Federal Power Act requires the Electric Reliability Organization to develop mandatory and enforceable Reliability Standards, which are subject to Federal Energy Regulatory Commission (Commission) review and approval. Commission-approved Reliability Standards become mandatory and enforceable in the U.S. according to the Implementation Plan associated with the Reliability Standard, as approved by the Commission.

So I guess Texas power companies might be saving money by not having to comply with those regulations either, although Texas does have a non-profit org (the Texas Reliability Entity) that is part of NERC (not to be confused with ERCOT itself, which also has "reliability" in its name.) On the other hand, Texas RE does seem to a have a certain state mandate, but it's not clear to me if this entails that its members need comply with NERC regs/standards:

Users, owners, and operators within ERCOT are eligible for membership in Texas RE at no cost. [...]

The Public Utility Commission of Texas (PUCT) has authorized Texas RE to serve as its Reliability Monitor for the state of Texas and for ERCOT.

While one can find data on fines imposed by FERC due to failure to comply with price reporting regs etc., I'm not having much luck with data on FERC/NERC fines related to reliability failures or non-compliance. There's also one newspaper source which claims that being subject to FERC/NERC reliability requirements entails weatherized equipment, but I'm having trouble confirming the specifics on that.

Answer 4

The cost of complying with the FPC was calculated in an 1970 paper The Effectiveness of the Federal Power Commission. In 2021 dollars, these are $653 million at the high end of the range. Given that over the last 50 years the regulatory burden has only increased, the true current cost is likely to be much higher. I have excluded Texas's portion of FPC's direct cost because of it's low size and how to measure.

Contrast this with benefits accrued:

The paper goes into detail why they believe gas field benefits should be zero. So what you have is $36 to $85 million in costs versus $22 million in benefits.

One caveat has to be mentioned. This article in no way tries to account for benefits already achieved by Texas's regulatory scheme. Some of those benefits are very much likely accruing given the size of the Texas market, intra-state activity, and competition in it, and that commercial sales are allowable interstate as the article in the OP observes. Unless Texas was to get rid of their internal agency, being put under the federal regulatory umbrella may be just adding costs. Final point is that the price elasticity is apparently a key driver in benefit analysis.

Answer 5

Tax Revenue

By not trading on the national market, Texas avoids the cost of federal power regulations, as noted in several other answers. Now, the benefits of participating in the national market might seem like an obvious loss for Texas. They could have purchased power from many other states with excess capacity during this time.

However, Texas is enjoying what you might call the "Federal Privatization Tax", which is the situation that arises when a market operator is able to privatize profits while dumping costs on the public. The most obvious example is the 2008 Financial Crisis and the massive bailouts received by the banking sector.

It may not seem obvious that the same is happening in Texas, until you realize that Gov. Abbott declared a state of emergency, then requested Biden to declare a federal emergency for TX to free up FEMA and other assistance. And, because Americans are reluctant to leave their fellow Americans out in the cold, to suffer the consequences of their carefully considered decisions, Biden agreed to the disaster declaration.

Federal Insurance

It's funny that individual taxpayers are required to purchase liability insurance to enjoy the privilege of driving on public roads, but states are not required to purchase "regulatory insurance" to enjoy the privilege of federal disaster relief. When power plants in MN or ND or ME experience freezing temps, but survive just fine because federal regulations required larger safety margins, the ratepayers in those states pay more for electricity, but receive larger uptime performance. If there were a major disaster in one of those states that precipitated a federal disaster declaration and accompanying relief, taxpayers in other states should not resent the outcome too much, because the affected states have already paid in their "insurance premiums".

Texas, on the other hand, has chosen to forego the "federal insurance" of the national power regulatory framework, but still receives the protection of federal disaster relief. And so, Texas taxpayers are transferring my tax dollars to their state under the force of the Federal executive.

I would actually be ok with this, if FEMA dollars were conditioned upon states adhering to or adopting nationwide precautionary measures for whatever situation precipitates the emergency. "You want emergency relief for your short-sighted grid planning? No problem. But by accepting these dollars, you agree to fall under the oversight of the Federal Power Commission. Have a nice day."

Answer 6

Delivering electricity across state lines triggers additional regulation. If Texas wishes to avoid this additional regulation, it might wish to avoid crossing state lines. To repeat a comment made earlier under the question:

If the grids were interconnected, every electricity producer in Texas would export electricity over state lines... which allows the federal level to regulate them because of the Interstate Commerce Clause. This means even DC interconnections are extremely limited between Texas and the rest of the US, and required extensive legal battles to avoid triggering the Commerce Clause.

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First, it's important to correct Ted Wrigley's incorrect claims about the California energy crisis, which are relevant to the question.

I use the same example to highlight some of the downsides of such regulations, which might provide some of the motivation for maintaining an independent grid.

From Causes and Lessons of the California Electricity Crisis:

Much of the blame for California’s electricity crisis attaches to the state’s restructuring plan—but not to its objective, electricity deregulation. The state’s plan gained political support on the basis of what turned out to be faulty assumptions. It then played a role in turning market stresses—high demand for electricity and limited production capacity—in the summer of 2000 and beyond into a full-blown crisis, in which California’s major utilities could not buy enough power to supply their customers. But deregulation itself did not fail; rather, it was never achieved.

The restructuring plan did not remove sufficient barriers on both the supply and demand sides of the market to allow competition to work—in part because it was not designed to. Neither the state legislature and Public Utility Commission (PUC), which framed the plan, nor the Federal Energy Regulatory Commission, which approved it, envisioned the immediate or full deregulation of the electricity market covered by the plan. Instead, retail prices were to be frozen during an interim period.

In addition, the market outside the restructuring plan mostly remains regulated. The California PUC has no authority over municipal utilities in the state, utilities in neighboring states, federal power agencies, or interstate transmission companies. All of those entities are still subject to local and federal controls. The continuing regulation of utilities in other parts of California and in neighboring states contributed indirectly to California’s supply problems by limiting how much power those utilities were able or willing to sell outside their traditional service areas.

The lessons for the supply side of the market are twofold. First, restructuring is more likely to succeed when more of the power in a market is free to respond to price signals. As California attempted to restructure, regulatory constraints limited the flow of power to the state's wholesale market from municipal utilities in California, from utilities in other states, and from federal power agencies. Second, utilities should be free to manage the risks of adverse price movements in that competitive environment by entering into long-term contracts.

From The Causes of California's Energy Crisis:

Several decisions by the California Public Utility Commission (CPUC) and the State of California in design and implementation of restructuring California's electricity market were significant contributing factors to the creation of the energy crisis.

CPUC required that California's Investor Owned Utilities (IOUs) purchase all of their electricity from the wholesale power pool market at a rate based on the highest bid price paid for the electricity by the PX, even though some suppliers were willing to sell for less.

CPUC refused to allow California IOUs to enter into long-term contracts to purchase electricity (or other risk-hedging tools) to reduce its exposure to price volatility in the PX.

These decisions resulted in the disparity between retail rates frozen at a level 10 percent below those in effect in June 1996 and the wholesale cost of electricity charged California IOUs (through the PX) mostly by out-of-state suppliers.

Analysis of June 2000 price spikes in California's ISO's Energy and Ancillary Services Market, September 2000:

Regulatory barriers significantly enhance the ability of generation owners in the California market to raise prices in the PX and ISO energy and ancillary services market.

Joint EOB/CPUC Report to Governor Davis, August 2000:

In the PX Market, all electricity trades for a single price, a price set by the highest winning bid, even though other power plant owners are willing to sell the power at lower prices. This guarantees that customers do not receive the benefits of competition. This result is built into the California system as an integral part of the market design.

In summary,

Several factors led to California's energy crisis: (1) the PX's market structure flaws; (2) the ISO's market structure flaws; (3) CPUC's prohibition on long-term contracts and other risk reducing tools; (4) CPUC's forced divestiture of the IOUs' generation; and (5) FERC failed to timely respond to the crisis.

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Ted also claims that regulatory costs are not passed to consumers, but this is incorrect. For example, see How Do Federal Regulations Affect Consumer Prices? An Analysis of the Regressive Effects of Regulation:

Regulators and policymakers often claim that regulations are intended to protect the poorest and most vulnerable consumers. However, the effects of regulations are most harmful to the poor because regulations drive up the cost of doing business, resulting in higher prices. Unfortunately, the goods and services to which the poor devote much of their limited budgets, such as energy and food, are also the most heavily regulated.

From The Meaning of Regulatory Costs:

Regulatory costs are an essential aspect of the efficiency and quality of regulations. Moreover, they are a genuine loss of welfare which have a negative impact on national income. Surprisingly, regulatory costs are often neglected or misinterpreted in regulatory assessments, except—though only recently—for administrative compliance costs... We identify 16 direct and two indirect regulatory cost types...

Citizens and businesses, on the other hand, incur rent-seeking, information, planning, three types of compliance, delay and enforcement costs. The indirect costs comprise the efficiency loss plus, in the event of poorly designed or market-based regulation, also transaction costs. The neglect of any of these costs may lead to the underestimation of costs in absolute or relative terms and thus to inefficient regulatory choices.

Again, these downsides might provide some of the motivation for maintaining an independent grid.

Answer 7

It’s actually a purely economic reason. Regulations invariably increase cost, as regulation increases work above and beyond the cost of achieving a regulatory goal ie documentation of regulatory compliance.

Think of it this way, suppose they had to comply with the regulatory rules for every country in the world (ignoring jurisdiction). Suppose further that there were no conflicts, just that some were more strict than others. That would be a huge burden on a company just in the paperwork alone, but it would also be a problem in deciding which regulation to follow. If there’s a minimum distance between components, they would have to be aware of all of them, in order to be sure they complied.

Now, this of course isn’t that extreme, and for quite a while they didn’t have any regulatory rules to follow, but it still applies. No regulatory paperwork is going to be cheaper than one, and when the states added their own, one is cheaper than two.

NOTE: Just as you can exceed regulatory standards when they apply, you can exceed them even when they don’t. The desire to escape regulatory oversight is not limited to those that want to produce low quality crap. The main reason a company would want regulatory oversight is because they think it gives them an economic advantage. Not because they feel they need it in order to produce good work.