Thread by @SteveCicala

With most outages over, wholesale prices back to normal, and some truly shocking bills coming due, the policy discussion regarding the #TexasBlackout is ramping up. Some thoughts:

"Texas has a deregulated electricity sector. They failed to keep the lights on. Therefore Texas must regulate electricity." We're going to hear this a lot. We hear the opposite argument whenever a regulatory agency is found to be asleep at the switch (ahem, @US_FDA).

This is a convenient diagnosis that results in ideologues taking turns driving us into a ditch. "You screwed up, so it's my turn to drive." There are likely to be specific causes of last week's breakdown that don't necessarily reflect systemic "markets versus regulation" issues.

The right question is *which* regulations? Some are working, some are needed, others are not. And in all cases, these regulations need to be judged in the context of uncertainty: good decisions can nonetheless result in bad outcomes. A different regulation might have done worse.

More specifically, "Texas needs regulation" ignores that the areas surrounding Texas to the north and east *also* use markets to balance supply and demand. There were some storm-related outages, but nothing of the scale of Texas.

One key difference between these markets is that Texas allows higher prices during peak demand ($9000/MWh) in order to encourage sufficient generation capacity. The other markets have lower peak prices, but run separate capacity auctions. Should Texas switch to capacity markets?

I'm not convinced. Capacity auctions are run annually to ensure there are enough power plants open to meet peak demand. There were no indications that Texas was short on capacity by metrics these auctions would address: installed capacity relative to *projected* peak.

The design of capacity auctions is still in flux, and they are generally viewed as not working very well. They earn generators billions in revenue, but to what end is not entirely clear.

So if both approaches are going to deliver the same installed capacity (which may be down for maintenance with regulator approval in any case), which is the stronger incentive to produce when supply is scarce: $9000 or $1000?

Another major difference between Texas and its neighbors is that it has its own grid, with extremely limited capacity to draw power from others. I would bet this played a significant role in the duration of outages.

Gas lines may have frozen in TX, but there was plenty of idle generation capacity around the country that could have filled in the gap, if we had a transmission system to deliver it. The electricity island of Texas is a deliberate policy choice by local politicians.

They want it this way to avoid federal regulation of their grid, by keeping it within state lines. Aside from anti-DC culture war rhetoric, I haven't seen a coherent analysis of the costs of Federal Energy Regulatory Commission jurisdiction.

Ironically, the free-market rhetoric used to justify the status quo actually delivers protectionist outcomes. TX generators accept low prices when supply is flush, and consumers go dark when supply is scarce. That said, the whole country is woefully lacking transmission.

Finally, on consumer bills. TX is perhaps the only state that has real competition at the retail level. But this is probably not what you think it is. The distribution system--the wires you see--are still very much under rate-of-return regulation. So is transmission.

What are deregulated are the companies who buy power from the wholesale market, and resell it to customers. When the lights go out you call the distribution company (regulated). When you have a question on your bill you call the "retail electricity provider" (REP, deregulated).

There's a history of fly-by-night operations here, and it's vulnerable to all sorts of scams. These deserve scrutiny, but are not really today's focus. Instead, it's that their real innovation is to offer different types of plans to customers.

Averse to volatile bills? You can sign up for a fixed rate that doesn't fluctuate with wholesale prices. You can even smooth out your bill over the whole year so the summers don't hurt as much. But you can also fully expose yourself to wholesale price volatility.

The households with the most bill shock are the ones who secured low prices when generation was cheap (say $0.03/kWh), but are exposed to $9/kWh prices during peak demand. A household using 1 kWh for 5 days of these prices is looking at a $1000 bill. Usage was higher in the cold.

There's a good case to be made that consumers didn't understand the full extent of their exposure here. But a bail-out risks encouraging customers in the future to expose themselves to risk they can't bear with the expectation that the government will intervene.

So perhaps there is room for restrictions on the types of contracts REPs can offer, under the reasoning that $10,000 energy bills are some combination of repugnant and unlikely to be collected anyway.

Companies paying their customers to find another supplier (as occurred the weekend before the storm) is not a sign of a well-functioning market. I think there's work to do in this area.

That said, reduced usage due to high prices is a good thing in general: When it costs $9/kWh to generate, it's wasteful when consumers are behaving as if energy is cheap and plentiful. So there's a balance to strike.

But it's important to remember the every-day costs that don't make the front page. I would guess that customers with capacity markets will have paid more over the past 10 years than TX customers after 2021. Yet who is prepared for collecting half that difference in 1 week?

Bottom line: with a crisis like this, there's a risk of judging policy decisions based on ex post outcomes, and imagining one's preferred policy is without flaws. Such an approach to policymaking may shift blame without actually avoiding the next disaster.