Commentary: Reaganomics and the Texas Grid

Editor's note: The views expressed in this article are the author's own. 

When demand goes up, free markets respond with more products—except in the Texas electricity market.  

For weeks on end this summer, the Electric Reliability Council of Texas (ERCOT) has begged millions of consumers to cut usage while simultaneously pricing electricity at more than 100 times the cost. The ERCOT wholesale electricity price has frequently been 100 times higher than the price in California. How did we get here?  

Texas disaggregated the vertically integrated and rate-of-return regulated electric utility industry in ERCOT more than 20 years ago. The reason given was that some power plants earned revenues year-round, even if they were only operating for a few weeks during peak summer months. Why pay for the time they are not running?

The “deregulation” became a competitive market in the way a pig farmer cuts costs by cutting back on feed. Of course, the pigs “competed,” but without enough food to go around, some went hungry. That is how the ERCOT market has treated its portfolio of coal, natural gas and nuclear power plants, which never expanded, even as the Texas economy grew from $1.25 trillion in 2010 to $1.99 trillion in 2021.

Since my December 2022 column, Texas courts have stepped in to confirm ERCOT is a state monopoly over the wholesale electricity market. The Supreme Court of Texas ruled that ERCOT is an “arm of the state.” The Texas Third Court of Appeals ruled that the Public Utility Commission of Texas, PUCT, broke the law by ignoring the market price of $1,200 per megawatt-hour (MWh) and instead fixing the electricity price at $9,000/MWh during the February 2021 winter storm. Former ERCOT CEO Bill Magness testified under oath in federal court that Texas Gov. Greg Abbott ordered the price fixing. The governor’s re-election campaign disputed the account, but the governor has not been placed under oath.  

What could be more anti-competitive? Imagine if the president or the U.S. Treasury could price the S&P 500 or fix the price of Apple’s shares. 

The late William Niskanen was a long-time markets adviser to President Ronald Reagan and author of the book Reaganomics. In his groundbreaking book Bureaucracy and Representative Government, he argued that unelected, unaccountable bureaucracies work to preserve their exclusive monopolies. The regulators then need the businesses they regulate more than they need the public. In turn, these businesses then make campaign contributions to the elected officials who oversee the bureaucracies.  

Does that fit with ERCOT? ERCOT rakes hundreds of millions of dollars off the top of Texans’ electricity bills. ERCOT’s CEO’s pay package is more than $1 million per year. Seems like a lot to protect. Following the 2021 freeze and legislative session, elected leaders were “were showered in cash,” by many of the very energy companies that failed to deliver as reported by The Texas Tribune. The Texas government delivered billions in customer funded corporate bailouts for the “losers” during the winter storm—the return on investment for the contributions.

Bills and proposals that would have helped the average Texas consumer died in both the 2021 and 2023 legislative sessions, and ERCOT’s frequent conservation alerts have reminded consumers that the grid has not been fixed. It is not that anyone believed that there would be 97,000 megawatts (MW) of summer capacity as the PUCT and ERCOT announced on May 3, but the alarming calls for conservation are occurring—even with demand below 85,000 MW. Wholesale prices have skyrocketed in accordance with ERCOT’s non-market driven computer program. It replicates the action of a monopolist who characteristically restricts supply to drive prices higher. ERCOT is now working for its generators, as Niskanen would have predicted. 

Texas leaders have repeatedly turned down proposals that would add at least 9,000 MW of natural gas power plants. The proposals required a competitive return on capital for the owners. Incumbent generators complained, but did not step forward to build new units. Why would they? If adding new power plants depresses price, the correct choice is not to build. That is the perverse outcome of a government-designed “market” in the face of a growing Texas economy.

To quote President Reagan, "The nine most terrifying words in the English language are: I'm from the government, and I'm here to help." The “help” brought to Texas by former governors Bush and Perry, and perpetuated by the Legislature and Governor Abbott killed hundreds of Texans and cost voters hundreds of billions of dollars. Reagan was correct, at least in this case. The Texas government hasn't helped ensure consumers have access to reliable, affordable electricity. Texas, it turns out, abandoned free markets and conservative economic principles decades ago.