Storm Uri: The PUCT’s $26 Billion Electricity Tax (Part I)

By Bill Peacock -- January 24, 2024

Editor’s Note: The following is the first part in a three-part series by the Energy Alliance, a project of the Texas Business Coalition, examining how the Public Utility Commission of Texas has violated consumer choice and market forces in the Texas electric market. MasterResource presents this analysis as an example of the perils of central planning and government monopoly.

On January 30, the Texas Supreme Court will hear arguments to determine the legality of a 2021 Public Utility Commission of Texas (PUC) rule that effectively imposed a $26 billion monopoly tax on buyers of electricity during Winter Storm Uri. The lawsuit to overturn the PUC’s decision was filed by electricity generator Luminant and others who lost money because of the PUC’s decision. [1] The Texas Third Court of Appeals found in favor of Luminant, ruling last year that the PUC’s price-setting rule was illegal.

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.” Tex. Util. Code § 39.001(a).

Yet ever since then, the PUC has been tinkering with the price of electricity to meet the needs of politicians rather than consumers. One result of this is that $22 billion of renewable energy subsidies has led to more than $66 billion being invested in wind and solar generation in Texas. This further destabilized the electricity market in Texas and was a major factor in the blackouts that turned out the lights in Texas for at least three days in many parts of the state.

It was in this context in 2021 that the PUC stopped tinkering around the edges and made the decision to 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 the 100-year storm put extreme pressure on the Texas grid as the ability to meet historically high demand was crippled by the increasing strain on generation capacity. Yet, ERCOT’s pricing rules worked as designed, with prices fluctuating between $2,000 and $4,000 per MWh—much higher than the average price of around $30. However, the PUC was also under extreme pressure to do something to end the unprecedented blackouts that were crippling the state.

Bending to the political pressure, 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. A review of economic literature and theory clearly shows that the PUC’s order runs counter to the normal forces of competition and counter to how prices are set in competitive markets and how they would be set in “a fully competitive electric power industry” (Tex. Util. Code § 39.001(a)).

The PUC Set a Monopoly Price in ERCOT

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.

According to economist Murry Rothbard, “To Adam Smith and to his successors, ‘competition’ was not a term defined with mathematical precision; it meant, generally, ‘free competition,’ i.e., competition unhampered by governmental grants of exclusive privilege. And ‘monopoly’ tended to mean such grants of governmental privilege. To Adam Smith, for example, ‘competition’ was used in the common-sense way that businessmen use it: to mean rivalry between two or more independent persons or firms. ‘Free competition’ meant absence of grants of exclusive privilege, freedom of trade and freedom of entry into occupations; ‘monopolies’ meant grants of exclusive privilege” (Murray Rothbard).

Adam Smith further 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.”

The Public Utility Commission Imposed a $26.3 Billion Monopoly Tax on Texans

According to a study by London Economics International, the average market price during Uri 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.”

The figure below from ERCOT’s IMM graphically portrays the relationship of the PUC’s fiat price during the week of February 15, 2021 to competitive prices over the previous 13 months.

Similarly, the chart below shows that the PUC’s fiat price resulted in the average price for 2021 being almost seven times higher than in the previous year.

In no market where the normal forces of competition are allowed to function could the PUC’s fiat price have formed and remained in effect. The PUC’s fiat price-setting rule that imposed what was essentially a monopoly price on the ERCOT market for 80 hours bears no resemblance to the natural forces of competition. It not only contravened statutory language and ran counter to statutory objectives that electricity prices should be determined by the normal forces of competition, it also contravened the “sovereign natural law” that governs voluntary exchanges among all participants in a competitive market. 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.

[1] Illuminant was a generator that had to buy outside electricity to fulfill its contract; other generators able to perform received the windfall under ERCOT pricing.

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Part 2 will examine how during Winer Storm Uri the Texas electricity market resembled more closely the completely regulated Texas title insurance market rather than the competitive market it was designed to be.