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EXCLUSIVE: Former ERCOT Board Member Says ‘Toxic Politics’ Spurred Resignations After Texas Grid Failure

EXCLUSIVE INTERVIEW Peter Cramton ERCOT

For the first time since six ERCOT board members resigned, one of those board members gave a one-on-one interview about the power failure, the political fallout and the financial future of the grid in the wake of last month's deadly outages.

Peter Cramton is an economics professor at the University of Cologne and the University of Maryland. He has expertise and experience in complex market designs, including electricity and radio spectrum markets. He served as an “independent director” on the board of the Electric Reliability Council of Texas (ERCOT) from 2015 until last week.

At his final board meeting, he said, “ERCOT was flying a 747. It had not one, but two engines experience catastrophic failure. (ERCOT) then flew the damaged plane for 103 hours before safely landing in the Hudson. In my mind, the men and women in the ERCOT control room are heroes.”

Interview highlights:

Cramton said he and other board members resigned because of the “toxic politics” around ERCOT. The governor and state legislature have aimed the bulk of their criticisms at the organization.

“We didn't leave the sinking ship," Cramton said. "We were thrown off the boat.”

He said ERCOT alone does not have the ability to prevent a future electricity crisis caused by another extreme winter event. He said the Public Utility Commission of Texas and the state legislature hold most of the power to take action on that front.

Cramton said the ERCOT board’s discussions of important topics are less candid when they overlap with hot political issues, but that some challenges — like climate change — are still taken into tacit consideration.

“Everyone recognizes that climate change is happening, that there is a transition to renewable resources, and it is going to happen,” he said. “I'm sure all the board members realize that. I certainly never encountered anything to suggest otherwise. The conversation changes a little bit. But everyone understands that the world is changing, and we have to respond with an energy market for the future — not one of the past.”

He said he’s concerned by the prospect of increased consolidation in the electricity retail market. A recent Public Utility Commission decision could allow industry behemoths like NRG and Vistra to scoop up even more consumers from failing companies.

“It is a very serious problem,” he said. “It is what led — what leads, in banking, to the problem of ‘too-big-to-fail,’ where the one or two or three banks that remain standing are huge monsters that can't fail. And what that does is it destroys the incentives for good behavior.”

Transcript:

This conversation has been edited for clarity and length. This story from KUT includes a list of definitions for energy industry terminology.

Dominic Walsh: Could you help me understand your role as an “independent director?” And does it make sense for some of the independent directors to live out of state? There's a lot of controversy around that.

Peter Cramton: What’s unusual is that we have a hybrid board that consists of “affiliated directors” that are affiliated with a particular stakeholder group. There's complete transparency on that, who they're affiliated with. And it is completely balanced. There are four affiliated directors representing the supply side, and there are four affiliated directors representing the demand side. So those are the two sides of almost every market — supply and demand, production and consumption — and there is a perfect balance. Then there's the “independent directors.” There's five independent directors, and the independent directors can have no association with either side of the market. The challenge with independent directors is: It's hard to find people that have the technical expertise, and (are) independent of the market participants. Now, here's the problem: So, one natural thing is you could say, "Well, you know, it's important that the directors live in Texas." Well, then you’d just be imposing another constraint. So, if we say, "OK, now you have to be independent from all market participants. You have to live in Texas. And you have to be an expert in a highly technical industry…" The reality is it's going to be very difficult to find people that fill all of these.

Walsh: So far, you've described a bunch of advocates for various sectors, and a bunch of experts. It sounds slightly more technocratic than democratic. So, where is the accountability to the public — the democratic element of the board?

Cramton: Absolutely. So, it's critically important. And that is the Public Utility Commission of Texas. So, there's a Public Utility Commission that consists of three commissioners, and they provide that oversight. And in fact, that oversight is incredibly important. So, for example, it's the Public Utility Commission that is responsible for the more delicate decisions that are made in the market. And the Public Utility Commission has oversight over all the market rules. What about a renegade Public Utility Commission? You know, who's watching them? Well, who's watching them: that's the legislature and the governor. The commissioners serve largely for the governor and legislature. And if they're doing something that the governor, the legislature does not like, then the governor and legislature can take action to replace the commissioners or whatever other action they want. So that's the continued hierarchy in this governance structure, and that's all within Texas.

Walsh: Why did you resign? It sounds like you're a big fan of ERCOT and their mission. It sounds like you think ERCOT performed well throughout this. Why did you and other members of the board ultimately resign?

Cramton: We resigned, in short, because the politics are toxic right now. The governor and legislature suggested that we resign. And we basically took him up on that. And so that is the reason that we resigned. So, I think the best way to put it is: We were on the boat. And we were — we didn't leave the sinking ship. We were thrown off the boat. But we're all good swimmers, so I'm sure we'll all do just fine. And quite frankly, because of the toxic politics, we're not the ones that are — for me, I'm a professor. I'm an expert in electricity market design. And I'm not an expert in delicate politics.

Walsh: But I'm curious, are you concerned about the future of the market in Texas — the future of the board, now that it's lost a body of expertise? What lies ahead for the market, and for the ERCOT board, especially with this kind of “toxic politics,” as you describe it, swirling around?

Cramton: I'm an optimistic person. So, the optimistic person in me says that Texas will ride through this, and it will overcome the momentary challenges. And my heart breaks — it literally breaks for the people of Texas. I know that millions have suffered, and many tens have died as a result of this terrible crisis. But the good news is that it wasn't worse. It could have been much, much worse, and that was avoided. So I'm so grateful that that happened. And the second thing is: ERCOT has a very good framework right now, and has a wonderful plan going forward, which is called Passport to develop storage and distributed generation, and real-time co-optimization — all by 2024 — huge developments in forecasting capabilities. These are all the things that need to happen.

Walsh: So I'm curious, as a former member of the board, when y'all would meet, and you would talk about the grid — and you talk about reliability — was there anything that was off limits? And one thing that comes to my mind that I'm curious about is climate change. We know that climate change is making extreme weather events more probable, and that the historical kind of trends and extremes — that ERCOT, as well as other parts of the grid, look at — might not be a reliable indicator of what's to come. And that is obviously something that is within the realm of expertise that you would want the board to talk about. I'm curious if it would be within the bounds of what's politically convenient — if there would be retaliation? Can the board of directors over at ERCOT freely talk about everything within their field of expertise?

Cramton: That's a hard question. Let me say, you know, first of all: Yes, the politics within Texas are different than many parts of the United States. And that's not surprising because Texas is the capital — the energy capital of the United States. And historically, that has meant fossil fuels. And the fossil fuels industry are not too excited about climate change. And so those politics certainly limit the way one talks about these issues. It doesn't mean you don't have them in your head and are making decisions and recommendations based on that information. And everyone knows about this. So it's not that we all have their heads in the sand — quite the opposite. Everyone recognizes that climate change is happening, that there is a transition to renewable resources, and it is going to happen. I'm sure all the board members realize that. I certainly never encountered anything to suggest otherwise. The conversation changes a little bit. But everyone understands that the world is changing, and we have to respond with an energy market for the future — not one of the past.

Walsh: Let's explore another kind of political hot topic, which is connecting to the rest of the nation's grid. Is that a topic that could be brought up? And I'm curious because, if not — if interconnectivity, if climate change, if some of these issues can't be candidly discussed because of political ramifications — what is the good of an independent board of directors, these experts? If they can't directly address subjects that are within their field of expertise, what good is that board? And on the issue of interconnectivity, is that one of those topics that could be broached, or not?

Cramton: So, that's a topic we certainly talked about — interconnections. And it was often a focus. Now, that particular issue you address — those discussions are not discussions that are especially relevant to ERCOT — or ERCOT’s board — because those discussions are definitely significant enough that they should be taking place at the (Public Utility Commission) and the legislature. You know, if you tell — if ERCOT’s instructed that that's something they should look at, absolutely, they'll look at it. And that is the appropriate role.

Walsh: I have two quick questions for you, just before you go — I know you're limited on time. First, does ERCOT have the ability — on its own — to take action to prevent a similar disaster in the future? If not, who else in Texas has the ability to take action on this?

Cramton: Well, it depends what you mean. So certainly, the operators have the ability and authority to respond to lots of forced outages. But —

Walsh: What do you mean — what do you mean by “operators?”

Cramton: The operators in the control room. So, is the question that we're talking about second-by-second, or —

Walsh: I'm talking about in terms of a catastrophic outage caused by a winter event like the one we just saw.

Cramton: In terms of preparation for extreme weather events: Again, this is a decision that needs to be on, not ERCOT, but the (Public Utility Commission) and the legislature. The reason is — so, one thing I haven't said: There is one number, in all this, that is the most important number, and that's $9,000 — that's the value of lost load. In the market, that number is the main instrument that induces behavior, both short run and long term. $9,000 is — for one gigawatt, combined cycle unit, during the 4.3 days of the Texas crisis — that generating unit would earn $1 billion. In a perfect market, both sides of the market would see and feel that real-time price, which during the crisis was $9,000. And I know that creates a lot of angst. But what happens is it induces the market participants to plan ahead, and take positions — hedge their risk by buying forward what they need.

Walsh: That $9,000 price that we ended up hitting is going to have ripple effects for companies that weren't properly hedged — that, you know, for one reason or another, had made promises to supply electricity at rates that they then could not afford. They're going to go under. There was a decision by the Public Utility Commission to basically open up the market, and make it easier for these giant corporations like Vistra and NRG — which already control a huge chunk of the market — this Public Utility Commission decision will make it easier for them to scoop up more consumers, as other companies go under. Is that increased consolidation in the long run an issue for you? Is that something that you're worried about? And also, while we're talking about Vistra, what do you make of the CEO of Vistra saying that he warned ERCOT ahead of the storm, and that he was met with a response that lacked urgency? So, two-fold question here: Increased consolidation — is that a concern for you? And this claim from the CEO of Vistra that he warned ERCOT ahead of time, and was met with a lack of urgency.

Cramton: Well, I don't want to get in any specific conversations of CEOs and that sort of thing, because I — that's not my bailiwick. But certainly, ERCOT was very well aware of the storm. They understood the challenges that the storm presented, and they worked extremely hard to prepare for the events that unfolded. Unfortunately for everyone — for ERCOT, for Vistra, for every supplier, for every demander — the events turned out to be much worse than anybody ever thought would happen. The reality is when ERCOT does its planning and looks ahead to see, “Do we have enough resources for the wintertime?” ERCOT looks at an extreme scenario. And that's the standard. But the extreme scenario was the worst they've ever experienced, which was January 2011. And the reality is we are starting to see events that are much more extreme. And so we need to take stronger actions.

Walsh: On the question of consolidation, though, because I know you're limited on time: So, the same market mechanisms that you've described — that you say work so well — have led to a situation where now these two companies are going to scoop up even more of the unregulated market share. Other people I've spoken with have said this will stifle competition and increase prices for ratepayers. Are you concerned about the future of the Texas electric market for consumers?

Cramton: Yes, I am concerned. So, whenever there's a crisis like this, there's people that are bankrupt. Savings and loan crisis: a bunch of banks are bankrupt. So, what happens to the bankrupt banks? They get acquired by the larger banks, which creates consolidation. And that's the problem that you're referring to, and it is a very serious problem. It is what led — what leads, in banking, to the problem of “too-big-to-fail,” where the one or two or three banks that remain standing are huge monsters that can't fail. And what that does is it destroys the incentives for good behavior. So, absolutely, we should maintain intense competition on the retail side, and on the supply side and the wholesale side of the market. And that would be the jurisdiction of the (Public Utility Commission) and legislature and any antitrust authority that you may have in Texas.

Additional context:

Governor's Office On "Toxic Politics" And Possible Legislative Action:

In a written response to inquiries about some of the points raised in the interview, Governor Greg Abbott’s press secretary said, “The system broke because of ERCOT’s failure to act, plain and simple. That is why the Governor has made it clear that this legislative session will not end until he and the Legislature pass solutions to mandate and fund the winterization of Texas’ power infrastructure, add more power to the grid, and ensure that these tragic events are never repeated.”

The issue of who will pay for power plant winterization — taxpayers via the legislature, as Abbott has proposed, or the multi-million and multi-billion-dollar companies that own the plants — is still being debated.

Vistra On CEO's Claims:

A Vistra spokesperson referred TPR to the company’s written testimony for the Texas legislature.

In the testimony, Vistra CEO Curt Morgan said, “On Wednesday, Feb. 10, we sounded the alarm and let ERCOT and others know we thought their projections were off.”

But ERCOT began raising alarms about the storm as early as Monday, Feb. 8, when it sent out a public notice to market participants telling them to “Review fuel supplies, prepare to preserve fuel to best serve peak load, and notify ERCOT of any known or anticipated fuel restrictions,” and to “Review and implement winterization procedures.”

Several of Vistra’s power plants underperformed during the storm, and the company expects to take an approximately $1 billion hit.

NRG And Vistra On Consolidation Concerns:

NRG and Vistra did not directly respond to concerns about market consolidation.

In a written statement, NRG subsidiary Reliant said, “By stepping up to be a (voluntary provider of last resort), Reliant is working to minimize any impact to customers affected by retailers exiting the market. (The Public Utility Commission) rules require (voluntary POLRs) to provide service using a market-based, month-to-month product. Customers who are switched to a POLR are free to choose another provider or plan at any time.”

TXU Energy, a subsidiary of Vistra subsidiary, said in a written statement, "It’s important to remember that customers dropped to POLR will be transitioned to a month-to-month plan and will still be able to choose a different electricity plan or provider that best meets their needs without penalty. There are numerous providers in the market and plenty of competition. The competitive market has continuously evolved to serve customers and we anticipate that competitive retailers will continue to be resilient in the face of the aftershocks of the winter storm grid event."

Further information:

An ERCOT spokesperson declined to comment on several issues raised in the interview.

The Public Utility Commission of Texas did not respond to requests for comment.

One topic not discussed in the interview: the $1.3 billion owed to electricity suppliers that ERCOT currently cannot pay. An ERCOT spokesperson told Texas Public Radio that the organization has 90 days to collect the payments from purchasers. When asked what happens after 90 days, the spokesperson wrote, “I don’t know what happens beyond the 90 days.”

Analysts expect a complicated set of negotiations, with possible outcomes including a massive bailout, or an “uplift” where costs are passed to market participants, including consumers.

This story has been updated to include a statement from Vistra subsidiary TXU Energy.

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